Discrete Pricing and Institutional Design of Dealership Markets
- Creators
- Bernhardt, Dan
- Hughson, Eric
Abstract
This paper models trade in dealership markets when the price grid is in discrete units. Strategic interaction among market makers is complex: Because prices are no longer determined by a zero expected profits condition, priority rules and the timing of offers—do market makers submit price schedules first, or do traders first submit their orders and then market makers set prices—have significant effects on equilibrium outcomes. Discreteness effectively limits competition and permits market makers to offer profitable quotes. In order-driven institutions where traders first submit orders, absolute time priority leads to the "best" price schedule, one which is "better" than that obtained from quote-driven institutions where brokers submit schedules first. This may explain the institutional structure of the NYSE.
Additional Information
We wish to thank seminar participants at Caltech, Queen's University, UBC, UCLA, Stanford University, the WFA and especially Peter Algert, Peter Bossaerts, Ian Domowitz, Burton Hollifield and Bart Lipman for valuable comments. The first author acknowledges financial support from Social Sciences and Humanities Research Council. This paper incorporates results from and supersedes ('Discrete Pricing and Dealer Competition." We take sole responsibility for any errors which remain.Attached Files
Submitted - sswp834.pdf
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Additional details
- Eprint ID
- 80812
- Resolver ID
- CaltechAUTHORS:20170825-151830431
- Social Sciences and Humanities Research Council (SSHRC)
- Created
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2017-08-28Created from EPrint's datestamp field
- Updated
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2019-10-03Created from EPrint's last_modified field
- Caltech groups
- Social Science Working Papers
- Series Name
- Social Science Working Paper
- Series Volume or Issue Number
- 833