Trading Floors as Separating Devices

Abstract

Traders with specific characteristics operating in a pairwise exchange market may prefer to meet other traders with similar (or complimentary) characteristics, while other categories of traders may not have such preferences. The existence of the second type imposes a negative externality on the first. Under conditions which are not very restrictive, establishing a trading floor designated for the former type induces the two types of traders to separate themselves –with one type trading on the floor and the other trading on the ‘street’. Separation may require assessing a fee for entry. The consequences for efficiency are mixed.