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Third Market Broker-Dealers: Cost Competitors or Cream Skimmers?

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  • Battalio, Robert H
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    Abstract

    This article compares the bid-ask spread for New York Stock Exchange-NYSE listed securities before and after a major third market broker-dealer, Bernard L. Madoff Investment Securities, begins to selectively purchase and execute orders in those securities. Tests reveal the quoted bid-ask spread tightens when Madoff enters the market. Furthermore, trading costs as measured by the difference between the transaction price and the midpoint of the contemporaneous bid-ask spread do not increase. Together, these results suggest that the adverse selection problem associated with allowing agents to selectively execute orders in exchange-listed securities may be economically insignificant. Copyright 1997 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 52 (1997)
    Issue (Month): 1 (March)
    Pages: 341-52

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    Handle: RePEc:bla:jfinan:v:52:y:1997:i:1:p:341-52

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    Cited by:
    1. Kervel, V.L. van, 2013. "Competition between stock exchanges and optimal trading," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5663709, Tilburg University.
    2. Piotr Staszkiewicz, 2013. "Czy Bazylea zmieniła kapitały?," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 30, pages 107-120.
    3. Foucault, Thierry & Menkveld, Albert, 2006. "Competition for order flow and smart order routing systems," Les Cahiers de Recherche 831, HEC Paris.
    4. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2013. "Competition/fragmentation in equities markets: A literature survey," SAFE Working Paper Series 35, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    5. Staszkiewicz, Piotr W., 2013. "Mechanizm wczesnego ostrzegania firm inwestycyjnych
      [Early warning mechanism of bankruptcy for investment companies]
      ," MPRA Paper 44290, University Library of Munich, Germany.
    6. Theissen, Erik, 2002. "Internalisierung und Marktqualität: Was bringt Xetra Best?," CFS Working Paper Series 2002/06, Center for Financial Studies (CFS).
    7. William O. Brown, Jr. & J. Harold Mulherin & Marc D. Weidenmier, 2006. "Competing With the NYSE," NBER Working Papers 12343, National Bureau of Economic Research, Inc.
    8. Sugato Chakravarty & Asani Sarkar, 1998. "An analysis of brokers' trading with applications to order flow internalization and off-exchange sales," Research Paper 9813, Federal Reserve Bank of New York.
    9. Jonathan Brogaard & Corey Garriott & Anna Pomeranets, 2014. "High-Frequency Trading Competition," Working Papers 14-19, Bank of Canada.
    10. Gresse, Carole, 2011. "Effects of the Competition between Multiple Trading Platforms on Market Liquidity : Evidence from the MiFID Experience," Economics Papers from University Paris Dauphine 123456789/7685, Paris Dauphine University.

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