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

Christopher G. Lamoureux, Charles R. Schnitzlein

Research output: Contribution to journalArticle

2 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)117-143
Number of pages27
JournalJournal of Financial Markets
Volume7
Issue number2
DOIs
StatePublished - Feb 1 2004

Keywords

  • Dealer competition
  • Market microstructure

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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