Title

Microstructure with multiple assets: an experimental investigation into direct and indirect dealer competition

Authors

Authors

C. G. Lamoureux;C. R. Schnitzlein

Comments

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Abbreviated Journal Title

J. Financ. Mark.

Keywords

market microstructure; dealer competition; MARKET-STRUCTURE; SECURITY MARKET; ODD-8TH QUOTES; TRADING COSTS; NASDAQ; LIQUIDITY; TRANSPARENCY; SPECIALIST; TRADERS; ASK; Business, Finance

Abstract

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 Title

Journal of Financial Markets

Volume

7

Issue/Number

2

Publication Date

1-1-2004

Document Type

Article

Language

English

First Page

117

Last Page

143

WOS Identifier

WOS:000188946800001

ISSN

1386-4181

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