Competition among Trading Venues: Information and Trading on Electronic Communications Networks

Abstract

This paper explores the competition between two trading venues, Electronic Communication Networks (ECNs) and Nasdaq market makers. ECNs o¡er the advantages of anonymity and speed of execution, which attract informed traders. Thus, trades are more likely to occur on ECNs when information asymmetry is greater and when trading volume and stock-return volatility are high. ECN trades have greater permanent price impacts and more private information is revealed through ECN trades than though market-maker trades. However, ECN trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and o¡er them better executions.TECHNOLOGICAL INNOVATIONS THAT ENABLE HIGH-SPEED, low-cost electronic trading systems are dramatically changing the structure of ¢nancial markets. Exchanges and markets around the world are merging or forming alliances to improve liquidity and reduce costs in the face of increased competition from each other and from these computerized trading systems. Trading volume on Electronic Communications Networks (ECNs) has grown rapidly over the past several years. ECNs are now involved in more than a third of Nasdaq trading volume and are attempting to increase their market share in NYSE-listed

Trade-through prohibitions and market quality

“…2 Easley et al (1996), Battalio et al (1997), Bessembinder and Kaufman (1997), and Barclay et al (2003) examine competition between venues and whether or not certain venues attract more or less informed traders. In addition, Barclay et al (2003) and Bessembinder (2003) find that markets offering better prices are more likely to attract orders.…”

“…In addition, Barclay et al (2003) and Bessembinder (2003) find that markets offering better prices are more likely to attract orders. Bloomfield and O'Hara (1998) use experiments, but both conclude that preferencing has little impact.…”

Ultra High Frequency Volatility Estimation with Dependent Microstructure Noise

“…ECNs represent over 30% of Nasdaq trading volume and are increasing their market share in NYSE-listed issues as well (see e.g., Barclay et al (2003)). Clearly, the decentralization of trading, combined with the increased frequency of trading, create challenges for the data collection which ultimately affect the estimation of a quantity as basic as the daily integrated volatility of the price.…”

Adverse selection, market access, and inter-market competition

“…Other papers (e.g. Grammig et al [2001], Barclay et al [2003], Goldstein et al [2007]) document differences in informed trading between dealer markets and anonymous electronic trading systems.…”