Floors, dealer markets and limit order markets

Thierry Foucault, Bruno Biais and François Salanié

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Abstract: In dealer markets, liquidity suppliers have entire flexibility to bargain on the price with their customers. In limit order markets, they are restricted to convex schedules: they cannot sell the first share at a higher price than the second. Floor traders simply respond to the liquidity demand conveyed by brokers by crying out one price. In floor markets risk-sharing is inefficient and spreads are large. In dealer markets, risk-sharing can be efficient, but spreads tend to be large. In limit order markets, the unique equilibrium entails efficient risk-sharing and competitive spreads. Hence there is a non-monotonic relation between the efficiency of the market and the extent to which the offers of the liquidity suppliers are restricted.

Keywords: Floor markets; Dealer markets; Limit orders; Market design; Tacit collusion (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (31)

Published in Journal of Financial Markets, 1998, Vol.1, n°3-4, pp. 253-284. ⟨10.1016/S1386-4181(98)00003-2⟩

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Journal Article: Floors, dealer markets and limit order markets (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00481194

DOI: 10.1016/S1386-4181(98)00003-2

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