Auction Versus Dealership Markets

Abstract

This paper compares two market structures, namely auction and dealership markets defined respectively as centralized order-driven and fragmented quote-driven markets. Our approach departs from previous works comparing these market mechanisms by considering both the timing of order submission (quote versus order-driven) and trading concentration (centralized versus fragmented) as dimensions differentiating these trading structures. We compare markets using measures of market viability, informational efficiency, price variance, informed trading aggressiveness and market liquidity. We find that this approach changes dramatically the results of previous works comparing these trading structures. Indeed, we prove that auction markets are less sensitive to asymmetric information problem and they exhibit higher level or informational efficiency than dealership markets. Moreovre, we find that the relative magnitude of price variance, informed trading aggressiveness and market depth in both structures depend on the market thickness.

Keywords: Auction markets, dealership markets, market performances, concentration

JEL Classification: D43, D44, D82