Competition for Order Flow and the Theory of Global Games: The impact of alternative trading systems on securities markets

I Introduction.- 1 Motivation.- 2 Objectives and Structure.- II Alternative Trading Systems.- 1 Impact of Technology on the Trading Industry.- 2 Overview of Alternative Trading Systems.- 3 Alternative Trading Systems in the U.S..- 4 Alternative Trading Systems in Europe.- 5 Impact of Alternative Trading Systems on Market Participants.- 6 Future Perspectives and Open Questions.- III Competition for Order Flow in Market Microstructure Theory.- 1 Introduction to Market Microstructure Theory.- 2 Fragmentation versus Consolidation of Liquidity.- 3 Models of Competition for Order Flow.- 4 Summary of Results.- IV Theory of Global Games.- 1 Introduction to Game Theory.- 2 Information and Knowledge.- 3 Introduction to the Theory of Global Games.- 4 Applications of the Theory of Global Games.- 5 Summary of Results.- V Competition for Order Flow as a Global Game.- 1 Equilibrium Selection in Games of Competition for Order Flow.- 2 Global Game with Endogenous Dealer Pricing.- VI Summary of Results and Further Research.- Appendix 1.- Appendix 2.- Appendix 3.

Dr. Jutta A. Dönges promovierte am Fachbereich Wirtschaftswissenschaften der Universität Frankfurt am Main. Sie ist seit mehreren Jahren in der Investment Banking Division einer amerikanischen Investment Bank tätig.

The proliferation of alternative trading systems has increased competition for order flow in financial markets significantly and renewed the debate on fragmentation versus consolidation. Market microstructure models that analyze liquidity-based intermarket competition typically exhibit multiple equilibria, making it difficult to determine whether fragmentation or consolidation of order flow will occur.

Jutta A. Dönges applies the recently developed theory of global games that
reduces multiplicity of equilibria in coordination games to a model of intermarket competition and demonstrates the existence of a unique equilibrium under fairly general conditions. The author investigates whether and under which circumstances alternative trading systems, particularly crossing networks, can co-exist with established markets or even replace them and explores how the introduction of a crossing network affects both
monopolistic and competitive dealer markets and the market participants'
behavior.