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

    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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