Economics at your fingertips  

Transparency matters: Price formation in the presence of order preferencing

Laurence Daures Lescourret and Christian Y. Robert

Journal of Financial Markets, 2011, vol. 14, issue 2, 227-258

Abstract: Using a market-making inventory model, we analyze the impact of order preferencing on dealers' quoting behavior by changing the degree of quote disclosure. We find that preferenced orders raise the inventory-holding costs of preferenced dealers, making them less able to post attractive quotes. In turn, competitors choose less aggressive prices, but still attract more likely public orders. Price competition is smoothed and expected market spreads widen. Promoting competition might be, however, enforced by (i) fine tuning through the degree of market transparency, (ii) favoring the entry of unpreferenced dealers, or (iii) requiring preferenced market-makers to have more funding capital.

Keywords: Preferencing; arrangements; Inventory; management; Transparency; Bid-ask; spread (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Haili He ().

Page updated 2020-12-10
Handle: RePEc:eee:finmar:v:14:y:2011:i:2:p:227-258