Biais, Bruno, Bisière, Christophe and Spatt, Chester (2010) Imperfect Competition in Financial Markets: An Empirical Study of Island and Nasdaq. Management Science, vol. 56 (n° 12). pp. 2237-2250.

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Identification Number : 10.1287/mnsc.1100.1243


The competition between Island and Nasdaq at the beginning of the century offers a natural laboratory to study competition between and within trading platforms and its consequences for liquidity supply. Our empirical strategy takes advantage of the difference between the pricing grids used on Island and Nasdaq, as well as of the decline in the Nasdaq tick. Using the finer grid prevailing on their market, Island limit order traders undercut Nasdaq quotes, much more than they undercut one another. The drop in the Nasdaq tick size triggered a drop in Island spreads, despite the Island tick already being very thin before Nasdaq decimalization. We also estimate a structural model of liquidity supply and find that Island limit order traders earned rents before Nasdaq decimalization. Our results suggest that perfect competition cannot be taken for granted, even on transparent open limit order books with a very thin pricing grid.

Item Type: Article
Sub-title: An Empirical Study of Island and Nasdaq
Language: English
Date: December 2010
Refereed: Yes
Uncontrolled Keywords: competition in financial markets, concurrence sur les marchés financiers, liquidity supply, offre de liquidité, trading mechanisms, mécanismes d'échanges, different tick sizes, différents pas de cotation
JEL Classification: G1 - General Financial Markets
G14 - Information and Market Efficiency; Event Studies
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 19 Dec 2011 05:45
Last Modified: 02 Apr 2021 15:33
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