Auction versus Dealership Markets: Impact of Proprietary Trading with Transaction Fees

Katsumasa Nishide¹, Katsumasa Nishide²

¹Graduate School of Economics, Hitotsubashi University, Japan
²Faculty of Economics, Ryukoku University, Japan

Abstract

In this study, we consider a one-period financial market with a monopolistic dealer/broker and an infinite number of investors. While the dealer who trades on his own account (with proprietary trading) simultaneously sets both the transaction fee and the asset price, the broker who brings investors orders to the market (with no proprietary trading) sets only the transaction fee, given that the price is determined according to the market-clearing condition among investors. We analyse the impact of proprietary trading on the asset price, transaction fee, trading volume, and the welfare of investors. Results show that proprietary trading increases both the trading volume and the transaction fee, and improves social welfare. Our study effectively demonstrates how proprietary trading affects market equilibrium and welfare of investors.

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Cite this Article as Follows

Katsumasa Nishide, Yuan Tian. Auction versus Dealership Markets: Impact of Proprietary Trading with Transaction Fees. International Conference on Business, Finance and Economics (2017): 07. Print.