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Trading Under Market Impact: Crossing Networks Interacting With Dealer Markets


Bielagk, Jana; Horst, Ulrich; Moreno, Santiago (2019). Trading Under Market Impact: Crossing Networks Interacting With Dealer Markets. Journal of Economic Dynamics and Control, 100:131-151.

Abstract

We use a model with agency frictions to analyze the structure of a dealer market that faces competition from a crossing network. Traders are privately informed about their types (e.g. their portfolios), which is something the dealer must take into account when engaging his counterparties. Instead of participating in the dealer market, the traders may take their business to a crossing network. The dealer must take into consideration that traders have this alternative when choosing a pricing schedule. We show that the presence of a crossing network may benefit traders even if they do not trade in it. Furthermore, it results in more traders being serviced by the dealer and the book’s spread shrinking (under certain conditions). We allow for the pricing on the dealer market to determine the structure of the crossing network, which itself influences the structure of the dealer market. This results in a feedback look that, under the same conditions that lead to a reduction of the spread, yields an equilibrium book/crossing network pair.

Abstract

We use a model with agency frictions to analyze the structure of a dealer market that faces competition from a crossing network. Traders are privately informed about their types (e.g. their portfolios), which is something the dealer must take into account when engaging his counterparties. Instead of participating in the dealer market, the traders may take their business to a crossing network. The dealer must take into consideration that traders have this alternative when choosing a pricing schedule. We show that the presence of a crossing network may benefit traders even if they do not trade in it. Furthermore, it results in more traders being serviced by the dealer and the book’s spread shrinking (under certain conditions). We allow for the pricing on the dealer market to determine the structure of the crossing network, which itself influences the structure of the dealer market. This results in a feedback look that, under the same conditions that lead to a reduction of the spread, yields an equilibrium book/crossing network pair.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 March 2019
Deposited On:16 Jan 2020 08:16
Last Modified:16 Jan 2020 08:17
Publisher:Elsevier
ISSN:0165-1889
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jedc.2018.09.009
Related URLs:https://www.sciencedirect.com/science/article/pii/S0165188919300016 (Publisher)
Other Identification Number:merlin-id:17138

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