Crossing networks and dealer markets: Competition and performance

This paper studies the interaction between dealer markets and a relatively new form of exchange, passive crossing networks, where buyers and sellers t rade directly with one another We find that the crossing network is charact erized by both positive ("liquidity") and negative ("crowding") externaliti es, and we analyze the effects of its introduction on the dealer market. Tr aders who use the dealer market as a "market of last resort" can induce dea lers to widen their spread and can lead to more efficient subsequent prices , but traders who only use the crossing network can provide a counterbalanc ing effect by reducing adverse selection and inventory holding costs.