The Benefits of Volume-Conditional Order-Crossing

41 Pages Posted: 16 Aug 2006

See all articles by Dean P. Foster

Dean P. Foster

University of Pennsylvania - Statistics Department

Simon Gervais

Duke University - Fuqua School of Business; Duke Innovation & Entrepreneurship Initiative

Krishna Ramaswamy

University of Pennsylvania - Finance Department

Date Written: February 12, 2007

Abstract

We assess the role and viability of an order-crossing or market-clearing mechanism that is automatically triggered only when a minimum number of shares can be crossed. Such a mechanism is naturally more attractive to traders who do not require much immediacy for their trades, as liquidity is cheaper in this market than in a continuous-auction market. The volume condition that we propose is crucial to the effectiveness with which this market complements the continuous-auction market in two important ways. First, when appropriately set, the volume condition endogenously adjusts the probability that market-clearing is triggered and so keeps impatient traders and highly informed traders away. Second, because market-clearing with a large volume condition reduces the effects of adverse selection in this market, patient traders are more willing to place orders in it. As we show, these effects often combine into a Pareto-dominating equilibrium when the continuous-auction market and the crossing mechanism with the right volume condition are both open.

Suggested Citation

Foster, Dean P. and Gervais, Simon and Ramaswamy, Krishna, The Benefits of Volume-Conditional Order-Crossing (February 12, 2007). Available at SSRN: https://ssrn.com/abstract=924410 or http://dx.doi.org/10.2139/ssrn.924410

Dean P. Foster

University of Pennsylvania - Statistics Department ( email )

Wharton School
Philadelphia, PA 19104
United States

Simon Gervais

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7683 (Phone)
919-883-5078 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty_research/faculty_directory/gervais/

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Krishna Ramaswamy (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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