IDEAS home Printed from https://ideas.repec.org/a/bla/jbfnac/v34y2007i1-2p349-373.html
   My bibliography  Save this article

The Market Quality of Dealer versus Hybrid Markets: The Case of Moderately Liquid Securities

Author

Listed:
  • Hung‐Neng Lai

Abstract

Over the last decade, electronic limit‐order trading systems have been sweeping securities exchanges around the world. This paper studies a transitional case, namely, the commencement of trading of a group of moderately liquid stocks on SETS of the London Stock Exchange. The evidence reveals that the liquidity of those stocks dropped substantially after the introduction of the limit order book and the removal of the market makers' obligations. This transition provides an example that a hybrid market with a limit order book and voluntary dealers may not perform as well as a dealership market with obligatory market makers.

Suggested Citation

  • Hung‐Neng Lai, 2007. "The Market Quality of Dealer versus Hybrid Markets: The Case of Moderately Liquid Securities," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 349-373, January.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:1-2:p:349-373
    DOI: 10.1111/j.1468-5957.2006.00665.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1468-5957.2006.00665.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1468-5957.2006.00665.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Marco Pagano, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 255-274.
    2. Sylvain Friederich & Richard Payne, 2007. "Dealer Liquidity in an Auction Market: Evidence from the London Stock Exchange," Economic Journal, Royal Economic Society, vol. 117(522), pages 1168-1191, July.
    3. Andy Snell & Ian Tonks, 2003. "A theoretical analysis of institutional investors' trading costs in auction and dealer markets," Economic Journal, Royal Economic Society, vol. 113(489), pages 576-597, July.
    4. Naik, Narayan Y & Neuberger, Anthony & Viswanathan, S, 1999. "Trade Disclosure Regulations in Markets with Negotiated Trades," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 873-900.
    5. Oliver Hansch & Narayan Y. Naik & S. Viswanathan, 1999. "Preferencing, Internalization, Best Execution, and Dealer Profits," Journal of Finance, American Finance Association, vol. 54(5), pages 1799-1828, October.
    6. Lauterbach, Beni, 2001. "A note on trading mechanism and securities' value: The analysis of rejects from continuous trade," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 419-430, February.
    7. Battalio, Robert & Jennings, Robert & Selway, Jamie, 2001. "The potential for clientele pricing when making markets in financial securities," Journal of Financial Markets, Elsevier, vol. 4(1), pages 85-112, January.
    8. Glosten, Lawrence R, 1989. "Insider Trading, Liquidity, and the Role of the Monopolist Specialist," The Journal of Business, University of Chicago Press, vol. 62(2), pages 211-235, April.
    9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    10. Erik Theissen, 2002. "Floor versus Screen Trading: Evidence from the German Stock Market," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 158(1), pages 32-54, March.
    11. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
    12. Peter C. Reiss & Ingrid M. Werner, 1998. "Does Risk Sharing Motivate Interdealer Trading?," Journal of Finance, American Finance Association, vol. 53(5), pages 1657-1703, October.
    13. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
    14. Naik, Narayan Y. & Yadav, Pradeep K., 2004. "Trading costs of public investors with obligatory and voluntary market-making: Evidence from market reforms," CFR Working Papers 04-06, University of Cologne, Centre for Financial Research (CFR).
    15. Amihud, Yakov & Mendelson, Haim & Lauterbach, Beni, 1997. "Market microstructure and securities values: Evidence from the Tel Aviv Stock Exchange," Journal of Financial Economics, Elsevier, vol. 45(3), pages 365-390, September.
    16. Michael J. Barclay & William G. Christie & Jeffrey H. Harris & Eugene Kandel & Paul H. Schultz, 1999. "Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks," Journal of Finance, American Finance Association, vol. 54(1), pages 1-34, February.
    17. Glosten, Lawrence R, 1994. "Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-1161, September.
    18. Madhavan, Ananth, 1992. "Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
    19. Nimalendran, M. & Petrella, Giovanni, 2003. "Do 'thinly-traded' stocks benefit from specialist intervention?," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1823-1854, September.
    20. Bessembinder, Hendrik, 1999. "Trade Execution Costs on NASDAQ and the NYSE: A Post-Reform Comparison," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(3), pages 387-407, September.
    21. Ian Domowitz, 2002. "Liquidity, Transaction Costs, and Reintermediation in Electronic Markets," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(1), pages 141-157, August.
    22. Kairys, Joseph Jr. & Kruza, Raimonds & Kumpins, Ritvars, 2000. "Winners and losers from the introduction of continuous variable price trading: Evidence from the Riga Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 24(4), pages 603-624, April.
    23. Benveniste, Lawrence M. & Marcus, Alan J. & Wilhelm, William J., 1992. "What's special about the specialist?," Journal of Financial Economics, Elsevier, vol. 32(1), pages 61-86, August.
    24. Battalio, Robert & Hatch, Brian & Jennings, Robert, 2003. "All else equal?: a multidimensional analysis of retail, market order execution quality," Journal of Financial Markets, Elsevier, vol. 6(2), pages 143-162, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Angelidis, Timotheos & Andrikopoulos, Andreas, 2010. "Idiosyncratic risk, returns and liquidity in the London Stock Exchange: A spillover approach," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 214-221, June.
    2. Patricia L. Chelley†Steeley, 2015. "The Role of Pre†Existing Liquidity in Determining Pricing Efficiency and Liquidity Gains Following the Introduction of SETSmm," European Financial Management, European Financial Management Association, vol. 21(2), pages 360-376, March.
    3. Zi Ning & Yiuman Tse, 2009. "Order Imbalance in the FTSE Index Futures Market: Electronic versus Open Outcry Trading," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 230-252, January.
    4. Zi Ning & Yiuman Tse, 2009. "Order Imbalance in the FTSE Index Futures Market: Electronic versus Open Outcry Trading," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1-2), pages 230-252.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    2. John Board & Charles Sutcliffe & Stephen Wells, 2002. "Transparency and Fragmentation," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-4039-0707-3.
    3. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    4. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    5. Nimalendran, M. & Petrella, Giovanni, 2003. "Do 'thinly-traded' stocks benefit from specialist intervention?," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1823-1854, September.
    6. Desgranges, Gabriel & Foucault, Thierry, 2005. "Reputation-based pricing and price improvements," Journal of Economics and Business, Elsevier, vol. 57(6), pages 493-527.
    7. G. Wuyts, 2007. "Stock Market Liquidity.Determinants and Implications," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(2), pages 279-316.
    8. Chung, Kee H. & Chuwonganant, Chairat & McCormick, D. Timothy, 2006. "Does internalization diminish the impact of quote aggressiveness on dealer market share?," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 108-131, January.
    9. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    10. Bessembinder, Hendrik & Venkataraman, Kumar, 2004. "Does an electronic stock exchange need an upstairs market?," Journal of Financial Economics, Elsevier, vol. 73(1), pages 3-36, July.
    11. Anand, Amber & Chakravarty, Sugato & Chuwonganant, Chairat, 2009. "Cleaning house: Stock reassignments on the NYSE," Journal of Financial Markets, Elsevier, vol. 12(4), pages 727-753, November.
    12. Levin, Eric J. & Wright, Robert E., 2004. "Estimating the profit markup component of the bid-ask spread: evidence from the London Stock Exchange," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(1), pages 1-19, February.
    13. Amber Anand & Carsten Tanggaard & Daniel G. Weaver, 2007. "Paying for Market Quality," CREATES Research Papers 2007-04, Department of Economics and Business Economics, Aarhus University.
    14. Chung, Kee H. & Chuwonganant, Chairat & McCormick, D. Timothy, 2004. "Order preferencing and market quality on NASDAQ before and after decimalization," Journal of Financial Economics, Elsevier, vol. 71(3), pages 581-612, March.
    15. Katya Malinova & Andreas Park, 2009. "Liquidity, Volume, and Price Behavior: The Impact of Order vs. Quote Based Trading," Working Papers tecipa-358, University of Toronto, Department of Economics.
    16. DESGRANGES, Gabriel & FOUCAULT, Thierry, 2000. "Reputation-based pricing and price improvements in dealership markets," HEC Research Papers Series 716, HEC Paris, revised 01 Mar 2002.
    17. Chung, Kee H. & Van Ness, Bonnie F. & Van Ness, Robert A., 1999. "Limit orders and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 53(2), pages 255-287, August.
    18. Menkveld, Albert J. & Wang, Ting, 2013. "How do designated market makers create value for small-caps?," Journal of Financial Markets, Elsevier, vol. 16(3), pages 571-603.
    19. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2013.
    20. Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011. "Price discovery in currency markets," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1696-1718.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jbfnac:v:34:y:2007:i:1-2:p:349-373. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.