Auction versus Dealership Markets: Impact of Proprietary Trading with Transaction Fees

Katsumasa Nishide and Yuan Tian ()
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Yuan Tian: Faculty of Economics, Ryukoku University

No 922, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: In this study, we consider a one-period financial market with a monopolistic dealer/broker and an infinite number of investors. While the dealer who trades on his own account (with proprietary trading) simultaneously sets both the transaction fee and the asset price, the broker who brings investors’ orders to the market (with no proprietary trading) sets only the transaction fee, given that the price is determined according to the marketclearing condition among investors. We analyze the impact of proprietary trading on the asset price, transaction fee, trading volume, and the welfare of investors. Results show that proprietary trading increases both the trading volume and the transaction fee, and improves social welfare. Our study effectively demonstrates how proprietary trading affects market equilibrium and welfare of investors.

Keywords: Proprietary trading; dealer market; brokered market; transaction fees (search for similar items in EconPapers)
JEL-codes: D42 D53 G12 (search for similar items in EconPapers)
Pages: 26pages
Date: 2015-04
New Economics Papers: this item is included in nep-mst
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