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On the Competition Between ECN's, Stock Markets and Market Makers

FMG Working Paper No. 0345

29 Pages Posted: 2 May 2000  

Thomas Serval

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ)

Eric Benhamou

Université Paris Est - Université Paris Est-Creteil

Date Written: February 2000

Abstract

Favored by the Security Exchange Commission, Electronics Communication Networks (ECNs) have grown as alternative trading systems that enable to bypass the markets makers on the stock markets and allow investors to directly compensate and execute their orders with more discretion and at a lower cost. In this paper we underline the fragile character of the current ECNs and question their competitive advantages through empirical evidences. We find a rationale for market makers and ECNs' excessive spreads and overreactions. The use of network theory highlights notions of critical mass, open interface and alliances. Moreover, since competition between market makers and ECNs is based on volume, the emergence of ECNs has been mainly possible because of the growth of the American stock market. Furthermore, strategies of new ECNs are built on anticipated future growth. Should the market shrink, ECNs would rapidly be forced to merge and most of them would disappear.

JEL Classification: G12

Suggested Citation

Serval, Thomas and Benhamou, Eric, On the Competition Between ECN's, Stock Markets and Market Makers (February 2000). FMG Working Paper No. 0345. Available at SSRN: https://ssrn.com/abstract=223872 or http://dx.doi.org/10.2139/ssrn.223872

Thomas Serval

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ) ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France

Eric Benhamou (Contact Author)

Université Paris Est - Université Paris Est-Creteil ( email )

61 avenue du Général de Gaulle
Créteil, 940000
France

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