A Match in the Dark: Understanding Crossing Network Liquidity

40 Pages Posted: 12 Jan 2010 Last revised: 18 Mar 2010

See all articles by Sugata Ray

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies

Multiple version iconThere are 2 versions of this paper

Date Written: January 12, 2010

Abstract

I model the decision of whether or not to use a crossing network (CN) or a traditional quoting exchange (QE) and derive hypotheses regarding the factors that affect this decision. I test these hypotheses on realized CN volumes and find that the likelihood of using CNs increases and then decreases with increasing relative bid ask spread and other measures of market liquidity. These findings are consistent with the model and reflect two countervailing effects: (1) increased savings on spread related transaction costs on CNs and (2) concerns regarding gaming when QE prices are more easily manipulated. Gaming concerns also decrease the consistency of volume on CNs. Additionally, I find that CN use increases with information asymmetry and the difficulty of disguising informed trading on QEs. In addition to providing empirical support for the model, these findings inform the debate on CN regulation and suggest that gaming is likely to inhibit CN growth.

Keywords: Crossing networks, exchanges, gaming, liquidity

JEL Classification: D53, G12, G28

Suggested Citation

Ray, Sugata, A Match in the Dark: Understanding Crossing Network Liquidity (January 12, 2010). Available at SSRN: https://ssrn.com/abstract=1535331 or http://dx.doi.org/10.2139/ssrn.1535331

Sugata Ray (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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