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Strategic Financial Intermediaries with Brokerage Activities

Germain, Laurent and Rousseau, Fabrice and Vanhems, Anne Strategic Financial Intermediaries with Brokerage Activities. (2010) In: The Handbook of Trading: Strategies for Navigating and Profiting from Currency, Bond, and Stock Markets. (McGraw-Hill finance & investing). Mac Graw Hill, New York, 389-402. ISBN 9780071743532

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Official URL: http://www.mhprofessional.com/product.php?isbn=0071743537

Abstract

In this paper, we study the strategic use by banks of their brokerage activities. We consider a situation where N competing banks engage in brokerage activities and have access to private information about the liquidation value of a risky asset could use their brokerage divisions to enhance their own profits. Selling brokerage activities, banks receive orders from their clients. This order flow is considered as uninformative i.e. as being noise. The banks’ ability to observe part of the total order flow i.e. its own volume and the one of its clients, even though it does not incorporate any private information, gives valuable information concerning the level of noise trading in the market. We show that taking advantage of that information, i.e. the strategic use of their brokerage activities, increases the banks’ expected profits. However, we prove that the aggregate expected profit is lower when banks strategically use their brokerage activities.

Item Type:Book Section
Uncontrolled Keywords:
Institution:Université de Toulouse > Institut Supérieur de l'Aéronautique et de l'Espace - ISAE-SUPAERO (FRANCE)
Université de Toulouse > Toulouse Business School - TBS (FRANCE)
Other partners > National University of Ireland Maynooth (IRELAND)
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Deposited By: odile huynh
Deposited On:13 Oct 2014 08:36

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