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Crossing Network versus Dealer Market: Unique Equilibrium in the Allocation of Order Flow

Jutta Dönges, Frank Heinemann and Tijmen R. Daniëls
Authors registered in the RePEc Author Service: Tijmen R. Daniëls

SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: The allocation of order flow to alternative trading systems can be understood as a game with strategic substitutes between buyers on the same side of the market, as well as one of positive network externalities. We consider the allocation of order flow between a crossing network and a dealer market and show that small differences in traders' preferences generate a unique switching equilibrium, in which patient traders use the crossing network while impatient traders submit orders directly to the dealer market. Our model explains why assets with large turnovers and low price volatility are likely to be traded on crossing networks, while less liquid assets are traded on dealer markets.

Keywords: Trading platform; order flow; strategic complements; strategic substitutes; global game (search for similar items in EconPapers)
JEL-codes: C62 G10 G20 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013-01
New Economics Papers: this item is included in nep-mst and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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