A PRINCIPAL–AGENT MODEL OF TRADING UNDER MARKET IMPACT -CROSSING NETWORKS INTERACTING WITH DEALER MARKETS

A PRINCIPAL–AGENT MODEL OF TRADING UNDER MARKET IMPACT -CROSSING NETWORKS INTERACTING WITH DEALER MARKETS

Abstract. We use a principal–agent model to analyze the structure of a book–driven dealer market
when the dealer faces competition from a crossing network or dark pool. The agents are privately
informed about their types (e.g. their portfolios), which is something that the dealer must take into
account when engaging his counterparties. Instead of trading with the dealer, the agents may chose
to trade in a crossing network. We show that the presence of such a network results in more types
being serviced by the dealer and that, under certain conditions and due to reduced adverse selection
effects, the book’s spread shrinks. We allow for the pricing on the dealer market to determine the
structure of the crossing network and show that the same conditions that lead to a reduction of the
spread imply the existence of an equilibrium book/crossing network pair.

A PRINCIPAL–AGENT MODEL OF TRADING UNDER MARKET IMPACT -CROSSING NETWORKS INTERACTING WITH DEALER MARKETS

A PRINCIPAL–AGENT MODEL OF TRADING UNDER MARKET IMPACT -CROSSING NETWORKS INTERACTING WITH DEALER MARKETS

Be the first to comment

Leave a Reply

Tu dirección de correo no será publicada.


*


Google Analytics