Market architecture: limit-order books versus dealership markets

Abstract

We analyze the customer's choice with respect to a limit-order book, a dealership market, and a hybrid market structure that combines the two. The customer's sell order is competed for and divided among a finite number of risk-averse market makers. We present a general characterization of equilibrium in the limit-order book. We show that when the order flow has a linear hazard ratio, the limit order book is preferred by risk neutral customers. However, a risk averse customer will prefer to trade in a dealership market when the number of market makers is large. Further, for risk averse customers, the hybrid market structure can dominate the dealership market and the limit-order book. The results are driven by a tradeoff between two features of the equilibrium demand schedules: a bid-shading effect that operates differently in a limit-order book compared with a dealership market, and a zero-quantity bid-ask spread that is present in the limit-order book only. r 2002 Published by Elsevier Science B.V.

Declining Valuations and Equilibrium Bidding Central Bank Refinancing Operations

“…As it turns out, the linear setup leads to piecewise linear bid schedules also in the discriminatory tender so that the bidding behaviour in the two tender formats can be studied and compared in a very explicit way. 13 The second contribution of this paper is the result that for large populations of bidders, bid shading may be present in discriminatory auctions (but not 12 Characterisation of bidding behaviour in the primary market that, while different in interpretation, are structurally similar to our results have recently been given by Biais, Martimort, and Rochet [6] in the context of adverse selection and by Viswanathan and Wang [53] in the context of risk aversion. Our analysis goes beyond these contributions by considering explicitly the possibility of trade between the bidders after the auction.…”

Dynamic order submission strategies with competition between a dealer market and a crossing network☆

“…Our welfare analysis builds on previous work that studies welfare and the optimal degree of transparency (see e.g. Pagano and Roëll (1996), Glosten (1998), Bloomfield and O'Hara (2000), Viswanathan and Wang (2002), Parlour and Seppi (2003), Goettler, Parlour and Rajan (2005), and Rindi (2007)). Our paper complements this literature by considering the impact of transparency on welfare in a setting where trading systems compete for uninformed order flow.…”

Auction Versus Dealership Markets

“…In the literature, the comparison between auction and dealership markets is generally based either on the timing of order submission (see for instance, Pithyachariyakul (1986), Madhavan (1992), Shin (1996), Bernhardt and Hughson (1996) and Viswanathan and Wang (2002)), or on the concentration of trading (see e.g. Mendelson (1987), Pagano and Röell (1996) and Biais (1993)).…”