Crossing Networks and Dealer Markets: Competition and Performance


  • Terrence Hendershott,

  • Haim Mendelson

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    • Simon School of Business, University of Rochester, and the Graduate School of Business, Stanford University. Helpful comments and suggestions by an anonymous referee, René Stulz (the editor), and Robert Hendershott are gratefully acknowledged.


This paper studies the interaction between dealer markets and a relatively new form of exchange, passive crossing networks, where buyers and sellers trade directly with one another. We find that the crossing network is characterized by both positive (‘liquidity’) and negative (‘crowding’) externalities, and we analyze the effects of its introduction on the dealer market. Traders who use the dealer market as a ‘market of last resort’ can induce dealers to widen their spread and can lead to more efficient subsequent prices, but traders who only use the crossing network can provide a counterbalancing effect by reducing adverse selection and inventory holding costs.