文档介绍：works and Dealer Markets:
Competition and Performance
Terrence Hendershott
and
Haim Mendelson∗
Revised October, 1999
ABSTRACT
This paper studies the interaction between dealer markets and a relatively new form of exchange,
passive works, where buyers and sellers trade directly with one another. We find that
the work is characterized by both positive (“liquidity”) and negative (“crowding”)
externalities, and 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 lead
to more efficient subsequent prices, but traders who only use the work can provide a
counterbalancing effect by reducing adverse selection and inventory holding costs.
∗Simon School of Business, University of Rochester and the Graduate School of Business, Stanford University.
ments and suggestions by an anonymous referee, Ren´e Stulz (the editor), and Robert Hendershott are
gratefully acknowledged.
Competition between exchanges for order flow is a growing phenomenon in financial markets. From
London to Paris to Tel Aviv, exchanges and trading systems are introducing new trading mechanisms
pete for order flow. In the ., the SEC promulgated new rules that redefine the regulation of
Alternative Trading Systems and intensify petition between existing exchanges and new electronic
markets. Indeed, new electronic trading venues are cited as the reason for a decline in the value of seats on
major exchanges, even though trading volumes are growing rapidly.
What will be the impact of new trading mechanisms on market participants and on existing dealer
markets (henceforth, “DMs”)? In this paper we study the effect of introducing a passive call market that
competes with an existing traditional DM. The DM is based peting market makers as in Nasdaq, the
London Stock Exchange, the Foreign Exchange market, and the . Government Securities market. An
important benefit pr