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Crossing Networks and Dealer Markets: Competition and Performance
Author(s) -
Hendershott Terrence,
Mendelson Haim
Publication year - 2000
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00281
Subject(s) - competition (biology) , adverse selection , market liquidity , externality , business , network effect , crowding out , crowding , microeconomics , monetary economics , industrial organization , economics , commerce , ecology , neuroscience , biology
This paper studies the interaction between dealer markets and a relatively new form of exchange, passive crossing networks, where buyers and sellers trade directly with one another. We find that the crossing network is characterized by both positive (‘liquidity’) and negative (‘crowding’) externalities, and we analyze the effects of its introduction on the dealer market. Traders who use the dealer market as a ‘market of last resort’ can induce dealers to widen their spread and can lead to more efficient subsequent prices, but traders who only use the crossing network can provide a counterbalancing effect by reducing adverse selection and inventory holding costs.