Market architecture: Limit-order books versus dealership markets


Journal Article

We analyze the customer's choice with respect to a limit-order book, a dealership market, and a hybrid market structure that combines the two. The customer's sell order is competed for and divided among a finite number of risk-averse market makers. We present a general characterization of equilibrium in the limit-order book. We show that when the order flow has a linear hazard ratio, the limit order book is preferred by risk neutral customers. However, a risk averse customer will prefer to trade in a dealership market when the number of market makers is large. Further, for risk averse customers, the hybrid market structure can dominate the dealership market and the limit-order book. The results are driven by a tradeoff between two features of the equilibrium demand schedules: a bid-shading effect that operates differently in a limit-order book compared with a dealership market, and a zero-quantity bid-ask spread that is present in the limit-order book only © 2002.

Full Text

Duke Authors

Cited Authors

  • Viswanathan, S; Wang, JJD

Published Date

  • January 1, 2002

Published In

Volume / Issue

  • 5 / 2

Start / End Page

  • 127 - 167

International Standard Serial Number (ISSN)

  • 1386-4181

Digital Object Identifier (DOI)

  • 10.1016/S1386-4181(01)00025-8

Citation Source

  • Scopus