Inter-dealer trading in financial markets
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review
|Journal / Publication||Journal of Business|
|Publication status||Published - Oct 2004|
|Link to Scopus||https://www.scopus.com/record/display.uri?eid=2-s2.0-15744383356&origin=recordpage|
We compare the following multi-stage inter-dealer trading mechanisms: a one-shot uniform-price auction, a sequence of unit auctions (sequential auctions), and a limit-order book. With uninformative customer orders, sequential auctions are revenue-preferred because winning dealers in earlier stages restrict quantity in subsequent auctions so as to raise the price. Since winning dealers make higher profits, dealers compete aggressively, thus yielding higher customer revenue. With informative customer orders, winning dealers use their private information in subsequent trading, reducing liquidity. Sequential trading breaks down when the customer order flow is too informative, while the limit-order book is robust and yields higher revenues. © 2004 by The University of Chicago. All rights reserved.