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Inter-market competition for exchange traded funds

Abstract

We examine how the different mix of informed and liquidity trading in the market for ETFs affects the nature of inter-market competition. We find that both the characteristics of the securities and the structures of the competing markets jointly determine the nature of inter-market competition. Given the superior execution quality on the ECNs and the low adverse selection costs in the ETF market, anonymous market such as the ECNs, attract both liquidity and informed traders. We also find that markets compete in a subset of ETFs. In addition, we find that quotebased competition is prevalent in the market for ETFs.

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Nguyen, V., Van Ness, B.F. & Van Ness, R.R. Inter-market competition for exchange traded funds. J Econ Finan 31, 251–267 (2007). https://doi.org/10.1007/BF02751646

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Keywords

  • Trading Cost
  • Market Maker
  • Price Impact
  • Informed Trader
  • Order Flow