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Kyle, A. (1984) Market Structure, Information, Futures Markets and Price Formation. In: Storey, G.G., Schmitz, A. and Sarris, A.H., Eds., International Agricultural Trade: Advanced Readings in Price Formation, Market Structure, and Price Instabilit, Westview Press, Boulder, 45-64.

has been cited by the following article:

• TITLE: Strategic Market Making and Risk Sharing

  AUTHORS: Hervé Boco, Laurent Germain, Fabrice Rousseau

  KEYWORDS: Risk Aversion, Strategic Market Makers, Strategic Traders, Splitting Orders

  JOURNAL NAME: Journal of Mathematical Finance, Vol.7 No.1, February 6, 2017

  ABSTRACT: We analyze the result of allowing a risk averse trader to split his order among risk averse market makers. We find that the market makers’ aggregate expected utility of profit can increase with the number of market markers and that the aggregate liquidity always increases with it. Despite this latter finding, we show that the cost of trading for the traders increases with the number of market makers as measured by their aggregate expected utility of profit. The larger the market makers’ risk aversion, the bigger that cost is. We also find that when the number of market makers tends to infinity, their aggregate expected utility of profit tends to zero. We also obtain that the market makers’ individual and aggregate expected utility of profit can increase with their risk aversion and that the trader’s expected utility of profit can increase or decrease with the market makers’ risk aversion. We offer a potential answer to the ongoing debate concerning the dealers’ competitiveness. Indeed, risk aversion reduces competition between market makers as it acts as a commitment for market makers to set higher prices. This commitment is higher the higher the risk aversion.