Microstructure with multiple assets: an experimental investigation into direct and indirect dealer competition
Abbreviated Journal Title
J. Financ. Mark.
market microstructure; dealer competition; MARKET-STRUCTURE; SECURITY MARKET; ODD-8TH QUOTES; TRADING COSTS; NASDAQ; LIQUIDITY; TRANSPARENCY; SPECIALIST; TRADERS; ASK; Business, Finance
This paper uses the economic laboratory to isolate the effects of direct and indirect competition on dealer profitability. We compare these two settings: (1) three competing dealers in a single asset (direct competition) with (2) three assets with a monopoly dealer in each (indirect competition). We find that: bid-ask spreads are wider, prices are less responsive to order flow (so there is less price discovery), and per-trade dealer profits are larger in the single-asset setting. Important economic differences between these two settings include a heightened adverse selection problem in the three-asset setting and a public good nature of price discovery in the one-asset setting. (C) 2003 Elsevier B.V. All rights reserved.
Journal of Financial Markets
"Microstructure with multiple assets: an experimental investigation into direct and indirect dealer competition" (2004). Faculty Bibliography 2000s. 4517.