Competition for Order Flow and the Theory of Global Games: The Impact of Alternative Trading Systems on Securities Markets

ISBN-13: 9783824474264 / Niemiecki / Miękka / 2001 / 273 str.

Jutta Donges

Opis

Jutta A. Donges applies the recent theory of global games to a model of intermarket competition and shows the existence of a unique equilibrium. The author investigates whether and under which circumstances alternative trading systems can co-exist with established securities markets or even replace them."

Spis treści

I Introduction.- 1 Motivation.- 2 Objectives and Structure.- II Alternative Trading Systems.- 1 Impact of Technology on the Trading Industry.- 1.1 Access to Financial Markets.- 1.2 Automation of the Trading Process.- 2 Overview of Alternative Trading Systems.- 2.1 Definition of Alternative Trading Systems.- 2.2 Functioning of Alternative Trading Systems.- 2.3 Benefits and Risks of Alternative Trading Systems.- 2.3.1 Benefits.- 2.3.2 Risks.- 3 Alternative Trading Systems in the U.S..- 3.1 Major Players.- 3.2 Regulatory Initiatives.- 3.2.1 Regulatory Basis for the Emergence of Alternative Trading Systems in the U.S..- 3.2.1.1 Order Handling Rules.- 3.2.1.2 Tick Size Reduction.- 3.2.2 Incorporation into Nasdaq Market Structure.- 3.2.3 Current Regulation of Alternative Trading Systems.- 3.2.3.1 Regulation ATS.- 3.2.3.2 Current Developments.- 4 Alternative Trading Systems in Europe.- 4.1 Major Players.- 4.2 Regulatory Environment.- 4.3 Market Potential of Alternative Trading Systems in Europe.- 5 Impact of Alternative Trading Systems on Market Participants.- 5.1 Impact on Traditional Exchanges.- 5.2 Impact on Intermediaries.- 5.3 Impact on Investors.- 6 Future Perspectives and Open Questions.- III Competition for Order Flow in Market Microstructure Theory.- 1 Introduction to Market Microstructure Theory.- 2 Fragmentation versus Consolidation of Liquidity.- 2.1 Liquidity.- 2.1.1 Definition of Liquidity.- 2.1.2 Overview of Research on Liquidity.- 2.2 Fragmentation versus Consolidation.- 2.2.1 Fragmentation versus Consolidation Controversy.- 2.2.2 Overview of Research on Fragmentation versus Consolidation.- 3 Models of Competition for Order Flow.- 3.1 Overview of Theoretical Research on Intermarket Competition.- 3.2 Model of Competition between Identical and Different Markets.- 3.2.1 Model.- 3.2.2 Summary of Results.- 3.3 Model of Competition between Search and Trading with an Intermediary.- 3.3.1 Model.- 3.3.2 Summary of Results.- 3.4 Model of Competition between a Crossing Network and a Dealer Market.- 3.4.1 Model.- 3.4.2 Summary of Results.- 3.5 Other Models of Intermarket Competition.- 4 Summary of Results.- IV Theory of Global Games.- 1 Introduction to Game Theory.- 2 Information and Knowledge.- 2.1 Information and Information Structure.- 2.2 Concept of Common Knowledge.- 2.3 Higher Order Beliefs.- 3 Introduction to the Theory of Global Games.- 3.1 Coordination Games.- 3.1.1 Characterization of Coordination Games.- 3.1.2 Approaches to Equilibrium Selection.- 3.2 Global Games.- 3.2.1 Symmetric Two Person Binary Action Game.- 3.2.2 Symmetric N-Person Binary Action Game.- 3.2.3 Summary of Results.- 3.3 Further Developments.- 4 Applications of the Theory of Global Games.- 4.1 Leading Example.- 4.1.1 Basic Model.- 4.1.2 Incomplete Information Model.- 4.2 Uniqueness of Equilibrium.- 4.2.1 Uniqueness with Uniform Distribution.- 4.2.2 Uniqueness with General Distributions.- 4.2.3 Limit Uniqueness and Noise Independent Selection.- 5 Summary of Results.- V Competition for Order Flow as a Global Game.- 1 Equilibrium Selection in Games of Competition for Order Flow.- 1.1 Framework.- 1.2 Game with Common Knowledge of the Value of Trade.- 1.3 Global Game with Incomplete Information of the Value of Trade.- 1.3.1 Existence of Dominated Strategies.- 1.3.2 Iterated Elimination of Dominated Strategies.- 1.4 Game with Individual Values of Trade.- 1.5 Discussion of Results.- 2 Global Game with Endogenous Dealer Pricing.- 2.1 Competition from a Crossing Network in Different Market Structures.- 2.1.1 Dealers’ Pricing Behavior.- 2.1.1.1 Monopolistic Dealer.- 2.1.1.2 Competitive Dealers.- 2.1.2 Comparison of Different Market Structures.- 2.2 Impact of the Introduction of a Crossing Network.- 2.2.1 Dealers’ Pricing Behavior without a Crossing Network.- 2.2.1.1 Monopolistic Dealer.- 2.2.1.2 Competitive Dealers.- 2.2.2 Comparison of Markets with and without a Crossing Network.- 2.3 Discussion of Results.- VI Summary of Results and Further Research.- Appendix 1.- Appendix 2.- Appendix 3.

O autorze

Dr. Jutta A. Dönges promovierte am Fachbereich Wirtschaftswissenschaften der Universität Frankfurt am Main. Sie ist seit mehreren Jahren in der Investment Banking Division einer amerikanischen Investment Bank tätig.

Blurb

The proliferation of alternative trading systems has increased competition for order flow in financial markets significantly and renewed the debate on fragmentation versus consolidation. Market microstructure models that analyze liquidity-based intermarket competition typically exhibit multiple equilibria, making it difficult to determine whether fragmentation or consolidation of order flow will occur.

Jutta A. Dönges applies the recently developed theory of global games that
reduces multiplicity of equilibria in coordination games to a model of intermarket competition and demonstrates the existence of a unique equilibrium under fairly general conditions. The author investigates whether and under which circumstances alternative trading systems, particularly crossing networks, can co-exist with established markets or even replace them and explores how the introduction of a crossing network affects both
monopolistic and competitive dealer markets and the market participants'
behavior.