1. Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network Discussion Frontiers of Finance, Bonaire 2005 Jennifer E. Bethel Babson College

2. 2 Intuition of model: What services do active and passive equity managers demand? Active  Quick execution  Guaranteed execution Quantitative/Passive  Low commissions  Little price impact

3. 3 Intuition of Model DMs offer immediacy and guarantee of trade to informed traders CNs offer low cost trade to less informed traders  Lower commissions  Lower probability of trading with informed trader

4. 4 Implications CN & DM cater to different types of traders.  Impatient traders prefer DMs.  Patient traders prefer CNs. The introduction of a CN increases overall order flow by attracting traders who would otherwise not submit trades. CNs divert trades from DMs. Opaqueness/transparency matters.

5. 5 Posit: 1987 - 1992 Quantitative/passive money managers Anonymous Confidential $0.02/share commission Midpoint pricing  save ½ the spread No unfavorable price impact from trading in open market 1 match/day around 11:30 Match took place within 10 minutes 600,000 shares matched/day in 1989; 4 million shares matched/day in 1992 (2 crosses/day: 11:30 and 1:30) 150 users

6. 6 Posit: 2004 Active/quantitative/passive money managers Anonymous Confidential ≤ $0.02/share commission Midpoint pricing  save ½ the spread No unfavorable price impact from trading in open market 12 matches/day  Within trading hours 9:45, 10:00, 10:15, 10:30, 11:00, 11:30, 12:00, 1:00, 2:00, 3:00, 3:30 Match takes place within 1 minute after above times Mid-point of bid/ask spread  After trading hours 4:45 Closing price 22.6 million shares matched/day Average execution size: 5,800 shares 550 users

7. 7 Posit

8. 8 In comparison … NASDAQ  Average monthly trade volume: 27.8 million  Average monthly share volume: 18.85 billion NYSE  Average monthly shares: 30,352.2 million  Average monthly value: $952.43 billion  Average execution size: 460 shares

9. 9 Question: When is a CN a CN? What is the objective of a particular CN? To achieve various objectives, which attributes are necessary?  Anonymous  Confidential - How transparent should the market be?  How many crosses/day?  How much possible delay?  How should shares in the match be rationed? LIFO? FIFO? Pro rata?  What are the ratios of patient/impatient traders under different scenarios?