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 Citations (Scopus)

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 2004

Fingerprint

Assets
Microstructure
Dealers
Economics
Price discovery
Profitability
Order flow
Bid/ask spread
Profit
Adverse selection
Monopoly

Keywords

  • Dealer competition
  • Market microstructure

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Microstructure with multiple assets : An experimental investigation into direct and indirect dealer competition. / Lamoureux, Christopher G; Schnitzlein, Charles R.

In: Journal of Financial Markets, Vol. 7, No. 2, 02.2004, p. 117-143.

Research output: Contribution to journalArticle

@article{7faa6d69f5e04def9f73c534e181df48,
title = "Microstructure with multiple assets: An experimental investigation into direct and indirect dealer competition",
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.",
keywords = "Dealer competition, Market microstructure",
author = "Lamoureux, {Christopher G} and Schnitzlein, {Charles R.}",
year = "2004",
month = "2",
doi = "10.1016/S1386-4181(03)00030-2",
language = "English (US)",
volume = "7",
pages = "117--143",
journal = "Journal of Financial Markets",
issn = "1386-4181",
publisher = "Elsevier",
number = "2",

}

TY - JOUR

T1 - Microstructure with multiple assets

T2 - An experimental investigation into direct and indirect dealer competition

AU - Lamoureux, Christopher G

AU - Schnitzlein, Charles R.

PY - 2004/2

Y1 - 2004/2

N2 - 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.

AB - 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.

KW - Dealer competition

KW - Market microstructure

UR - http://www.scopus.com/inward/record.url?scp=0742271791&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0742271791&partnerID=8YFLogxK

U2 - 10.1016/S1386-4181(03)00030-2

DO - 10.1016/S1386-4181(03)00030-2

M3 - Article

VL - 7

SP - 117

EP - 143

JO - Journal of Financial Markets

JF - Journal of Financial Markets

SN - 1386-4181

IS - 2

ER -