Market architecture : Limit-order books versus dealership markets

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)62_Review of books or of software (or similar publications/items)peer-review

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Original languageEnglish
Pages (from-to)127-167
Journal / PublicationJournal of Financial Markets
Issue number2
Publication statusPublished - Apr 2002
Externally publishedYes


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 © 2002.

Research Area(s)

  • Dealership, Limit-order book, Market microstructure