Trading Floors as Separating Devices

Traders with speci c characteristics operating in a pairwise exchange market may prefer to meet other traders with similar (or complementary) characteristics, while other categories of traders may not have such preferences. The existence of the second type imposes a negative externality on the rst. Under conditions which are not very restrictive, establishing a trading oor designated for the former type induces the two types of traders to separate themselves { with one type trading on the oor and the other trading on the `street'. Separation may require assessing a fee for entry. The consequences for e ciency are mixed. JEL Classi cations: D40, G20 |||||||||||{ I wish to thank the participants in the Friday Theory Workshop at the University of Sydney, and the participants at the 17th Theory Workshop at the University of Melbourne for comments and discussion. I am grateful to John Hillas and Stephen King for pointing out an omission in an earlier version.This work was initiated during the summer of 1998, while I was brie y a guest of the economics department at the University of Southern California. Their hospitality is acknowledged.