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Fragmentation and Strategic Market-Making

Published online by Cambridge University Press:  11 April 2022

Laurence Daures-Lescourret Open the ORCID record for Laurence Daures-Lescourret [Opens in a new window]  and
Sophie Moinas
Laurence Daures-Lescourret*
Affiliation:
ESSEC Business School
Sophie Moinas
Affiliation:
Toulouse Capitole University Toulouse School of Economics and TSM Research sophie.moinas@tse-fr.eu
*
lescourret@essec.edu (corresponding author)
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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 when absorbing shocks. Nonconstant 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-venue market-making behavior which is uniquely predicted by our model.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 4 , June 2023 , pp. 1675 - 1700
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We are very grateful to an anonymous referee, Jennifer Conrad (the editor), and Christine Parlour (discussant) whose comments helped to improve the paper. We would also like to thank Jonathan Brogaard, Giovanni Cespa, Jean-Edouard Colliard, Thierry Foucault, Andras Fulop, José Miguel Gaspar, Stefano Lovo (discussant), Albert Menkveld, Vincent van Kervel, and seminar participants at the 10th Annual Central Bank Workshop on the Microstructure of Financial Markets, the 24th CEPR/Gerzensee ESSFM Evening Sessions, the 2012 EIF Scientific Morning Conference, the EFMA 2014 Conference, the FMA 2013 European Conference, the FMA 2014 Conference, the 2013 French Finance Association, the 3rd Forum “Market Microstructure: Confronting Many Viewpoints,” the MFA 2014 Conference, the NFA 2014 Conference, and the ESSEC Brown Bag, CSEF, ESADE, the Toulouse Brown Bag seminar, University of Bristol, University of Valencia, the VU Amsterdam seminar, Wilfrid Laurier University, and the Zurich Finance seminar for providing useful comments. We especially thank Patrick Hazart for providing us Euronext data and José Finote from Euronext for insightful discussions. Financial support from the EIF and the ANR (ANR-09-JCJC-0139–01, ANR-10-JCJC-1810–01, and ANR-17-EURE-0010 (Investissements d’Avenir program)) is gratefully acknowledged. Of course, all errors or omissions are ours. This article previously circulated with the title “Liquidity supply in multiple venues.”

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