Volume 14 | Issue 4 | Article 2
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Trading on the Floor after Sweeping the Book
The recent emergence of hybrid markets that combine both automated as well as manual trading venues is a phenomenon not yet completely understood by academia or the industry. Are hybrid markets more efficient than stand-alone trading floors? Are hybrid markets needed when there is a fast market in place? Do hybrid markets generate incremental trading flow, or do they just re-distribute the flow between the two different venues? In a hybrid market, the fast electronic component provides immediate and deterministic access to liquidity, while the slow trading floor provides a risky execution. We study the competition between the two types of trading venues in a hybrid arrangement. We show that the critical issue that determines the ability of a trading floor to compete for order flow is whether sweeps in the electronic market take place at progressive price points or at the single clean-up price. When the fast market is of the clean-up type, the hybrid market generates more flow than any of its stand-alone components.
