Abstract
This thesis will apply the theory of global games to a model of competition for order flow between trading venues in order to investigate the impact of alternative trading systems on securities markets. While existing models of intermarket competition in market microstructure theory exhibit multiple equilibria involving both fragmentation and consolidation of order flow, the application of the theory of global games is able to reduce the multiplicity of equilibria and yields a unique equilibrium under fairly general conditions. Uniqueness of equilibrium in a global game of competition determines whether fragmentation or consolidation of order flow occurs and allows further analysis of the outcome of the game. Building on the global game of competition between a crossing network and dealer markets this thesis will further examine how the existence of a crossing network will affect dealer markets and overall market performance.
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See Wallmann (1999), Unger (1999), I.; Other driving forces are regulatory changes and the globalization of financial markets. Changes in regulation as a result of technological innovation affecting the trading industry, in turn, accelerate the transition of financial markets and increase competition, see Unger (1999), I., lati (1999b), p. 2 f; Globalization itself is a result of technological progress as it expands the reach of exchanges and other market participants by improving communication and speeding up the delivery of trading services, see lati (1999b), p. 3 ff, Wallmann (1999)
See, for example, lati (1999a), p. 2, FESCO (2000), p. 3
The difference between electronic communication systems and crossing networks is that electronic communication systems have their own price discovery process while crossing networks execute orders at a reference price taken from the asset’s primary stock exchange, see section 112.1
See Achleitner (2000), p. 27, McVey et al. (2000), p. 14
See Smith (1999), p. 20, Marenzi/Lee (1999), p. 10, Dornau (1999), p. 2
See von Heusinger (2000), Gruber/Grünbichler (2000), p. 769, a.u. (2000ab), Achleitner (2000), p. 27
See von Heusinger (2000), Dornau (1999), p. 25
See FESCO (2000), p. 3, Hegarty (1999), p. 12, Dornau (1999), p. 36
See, for example, Achleitner (2000), p. 27, a u. (2000ab), Gruber/Grünbichler (2000), p 769, von Heusinger (2000)
See McVey (1999), p. 56, Dornau (1999), p. 16
See von Heusinger (2000), O’Hara (1995), p. 269 f
See Schwartz (1988), p. 426 ff, Cohen/Maier/Schwartz/Withcomb (1986), p. 150; Theoretical research that suggests this result is presented by Grossman and Miller (1988) and Pagano (1989)
Examples include competition between the New York Stock Exchange and regional exchanges in the U.S., as well as parallel trading on the Frankfurt stock exchange and on regional exchanges in Germany.
Examples are the parallel trading of stocks at London’s SEAQ and the Paris Bourse or in the U.S. where large blocks of stocks are traded in the upstairs market.
Mendelson (1987), Biais (1993) and Madhavan (1995) present theoretical models that examine the performance of fragmented markets by analyzing and comparing different markets with different degrees of transparency, for details and further research see section II12.2.2
The question of the ability of markets to co-exist is also addressed in the following theoretical models. Glosten (1994) examines an idealized electronic limit order book and discusses whether it invites competition from third markets. Parlour and Seppi (1998) present a model of competition between different pairings of pure limit order markets and hybrid specialist/limit order markets. Viswanathan and Wang (1998) analyze competition between a limit-order book, a dealership market and a hybrid market structure of the two, assuming that traders differ with respect to size and their risk aversion; For details and the difference between these models and the models mentioned above see section II13.1
See Pagano (1998), p. 255 ff, Gehrig (1993), p. 97 ff, Hendershott/Mendelson (2000), p. 2071 ff as well as sections 1113.2 to 1113.4 for details
See Farell/Saloner (1985), Katz/Shapiro (1986, 1994)
See Diamond/Dybvig (1983)
See Obstfeld (1996)
See Cooper/John (1988), van Huyck/Battalio/Beil (1990), see also Cooper (1999) for a selection of examples from macroeconomics
See Morris/Shin (2000a), p. 2 f
See Carlsson/vanDamme (1993a), p. 993, Morris/Shin (2000a), p. 3; See section IV3.2 and IV4 for details
As already highlighted by Pagano (1989) and Gehrig (1993), multiple equilibria arise as a result of the coordination problem among traders.
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© 2001 Springer Fachmedien Wiesbaden
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Dönges, J.A. (2001). Introduction. In: Competition for Order Flow and the Theory of Global Games. Deutscher Universitätsverlag, Wiesbaden. https://doi.org/10.1007/978-3-663-07734-3_1
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DOI: https://doi.org/10.1007/978-3-663-07734-3_1
Publisher Name: Deutscher Universitätsverlag, Wiesbaden
Print ISBN: 978-3-8244-7426-4
Online ISBN: 978-3-663-07734-3
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