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Floors, dealer markets and limit order markets

Abstract : In dealer markets, liquidity suppliers have entire flexibility to bargain on the price with their customers. In limit order markets, they are restricted to convex schedules: they cannot sell the first share at a higher price than the second. Floor traders simply respond to the liquidity demand conveyed by brokers by crying out one price. In floor markets risk-sharing is inefficient and spreads are large. In dealer markets, risk-sharing can be efficient, but spreads tend to be large. In limit order markets, the unique equilibrium entails efficient risk-sharing and competitive spreads. Hence there is a non-monotonic relation between the efficiency of the market and the extent to which the offers of the liquidity suppliers are restricted.
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Submitted on : Thursday, May 6, 2010 - 10:55:04 AM
Last modification on : Sunday, June 24, 2012 - 4:30:32 PM

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Thierry Foucault, Bruno Biais, Francois Salanie. Floors, dealer markets and limit order markets. Journal of Financial Markets, Elsevier, 1998, Vol.1, n°3-4, pp. 253-284. ⟨10.1016/S1386-4181(98)00003-2⟩. ⟨hal-00481194⟩

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