Can Competition between Brokers Mitigate Agency Conflicts with Their Customers?

39 Pages Posted: 6 Feb 1997

See all articles by Sugato Chakravarty

Sugato Chakravarty

Purdue University

Asani Sarkar

Federal Reserve Bank of New York

Date Written: February 1997

Abstract

We study competitive, but strategic, brokers executing trades for an informed trader in a multi-period setting. The brokers can choose to (a) execute the order, as agents, first, and trade for themselves, as dealers, afterwards; or (b) trade for themselves first and execute the order later. We show that the equilibrium outcome depends on the number of brokers. When the number of brokers exceeds a critical number (greater than one), the informed trader distributes his order (equally) among the available brokers. The brokers, in turn, execute the informed trader's order first and trade personal quantities, as dealers, afterwards. When the number of brokers is below this critical value, the informed trader gives his order to a single broker, who, in turn, trades personal quantities as a dealer first and executes the informed trader's order second. Since the informed trader is hurt in the latter case, he prefers markets with many brokers. Thus, regulators can mitigate trading abuses arising from a conflict of interest between brokers' agency and principal functions (such as front running) by encouraging competition between brokers as an alternative to banning such practices. We empirically show that the critical number of brokers for the favorable competitive equilibrium appears to be satisfied for the futures contracts in our sample.

JEL Classification: G24, K22

Suggested Citation

Chakravarty, Sugato and Sarkar, Asani, Can Competition between Brokers Mitigate Agency Conflicts with Their Customers? (February 1997). Available at SSRN: https://ssrn.com/abstract=2342 or http://dx.doi.org/10.2139/ssrn.2342

Sugato Chakravarty

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

Asani Sarkar (Contact Author)

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

Register to save articles to
your library

Register

Paper statistics

Downloads
374
Abstract Views
1,563
rank
79,275
PlumX Metrics