Using an inventory model based on Ho and Stoll (1983), this paper examines how two competing risk-averse dealers supply liquidity in two different market systems. We find that price formation and market spreads are directly impacted by the way order flows are correlated ins systems. If order flows are negatively correlated, dealers expect to better manage their inventory position and market spreads reduce. When order flows are positively correlated, dealers are more likely to be touched on the same side which increases their inventory and market spreads increase. Further, this model shed new light on some empirical results (Hansh (2001), or Werner and Kleidon (1996)).
LESCOURRET, L. and MOINAS, S. (2006). Liquidity Supply in Multiple Markets? In: EFMA 2006. European Financial Management Association (EFMA).