Dynamic Order Submission Strategies with Competition between a.pptVIP

Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network Hans Degryse, University of Leuven and CentER Mark Van Achter, University of Leuven Gunther Wuyts University of Leuven Motivation Recently: “new trading platforms” coexist with “traditional markets” New trading platforms - Alternative trading systems: Electronic Communication Network (ECN) Crossing Network (CN): “a system that allows participants to enter unpriced orders to buy and sell securities. Orders are crossed at a prespecified time at a price derived from another market.” (SEC (1998)) Motivation Crossing Network: Lower costs (no spread), Anonymity Uncertain execution No price discovery Examples: Instinet Crossing Network, ITG Posit, E-Crossnet A survey of fund managers shows an expected 90% increase in crossing volume over the next two years Motivation Goal of this paper: Investigate impact of interaction of a batch-type CN and a continuous dealer market (DM) on the liquidity and order flow dynamics in both markets Main Findings DM caters to investors with high willingness to trade whereas CN to those with lower willingness to trade Introduction of CN induces “order creation” Even with random arrival of buyers and sellers and despite the absence of asymmetric information, systematic, non-random patterns in order flow arise Outline Related Literature Contributions Setup of the Model Equilibrium Markets in Isolation Equilibrium: DM and CN Empirical Predictions Different Informational Settings Concluding Remarks Related Literature Contributions We construct a dynamic model analyzing the interaction between a CN and a DM We add a CN to the dynamic models analyzing an individual trading system. Setup of the Model Based on Parlour (RFS, 1998) 2 days in the economy Agents decide upon consumption on both days: ? is the subjective preference or type Asset which pays out V units of C2 on day 2 Trading takes place during the first day, claims to the as