Fragmentation and Strategic Market-Making

70 Pages Posted: 20 Sep 2014 Last revised: 17 Jul 2020

Date Written: July 16, 2020

Abstract

How does trading in one venue affect the quoting strategies of market-makers in other venues? We develop a two-venue imperfect competition model in which market-makers face quadratic costs to absorb shocks. Non-constant marginal costs imply that absorbing a shock in one venue simultaneously changes marginal costs in all other venues. Moreover, market-makers strategically choose which shock(s) to absorb. These two forces may intensify competition, leading to enhanced liquidity. Using Euronext proprietary data, we track individual best bid and ask quotes of intermediaries in each venue. We uncover evidence of strategic cross-market quoting behavior which is uniquely predicted by our model.

Keywords: Market fragmentation, imperfect competition, cross-market inventory cost

JEL Classification: 360

Suggested Citation

Daures-Lescourret, Laurence and Moinas, Sophie, Fragmentation and Strategic Market-Making (July 16, 2020). Available at SSRN: https://ssrn.com/abstract=2498277 or http://dx.doi.org/10.2139/ssrn.2498277

Laurence Daures-Lescourret (Contact Author)

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX
France
+33 1 34 43 33 62 (Phone)
+33 1 34 43 32 12 (Fax)

Sophie Moinas

Toulouse School of Economics ( email )

Toulouse 1 Capitole University
Place Anatole-France
Toulouse Cedex, F-31042
France

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