Preferencing, Internalization, Best Execution, and Dealer Profits

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Preferencing, Internalization, Best Execution, and Dealer Profits

Author Info

Oliver Hansch (Pennsylvania State University,)
Narayan Y. Naik (London Business School,)
S. Viswanathan (Fuqua School of Business, Duke University)

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S Viswanathan

Abstract

The practices of preferencing and internalization have been alleged to support collusion, cause worse execution, and lead to wider spreads in dealership style markets relative to auction style markets. For a sample of London Stock Exchange stocks, we find that preferenced trades pay higher spreads, however they do not generate higher dealer profits. Internalized trades pay lower, not higher, spreads. We do not find a relation between the extent of preferencing or internalization and spreads across stocks. These results do not lend support to the "collusion" hypothesis but are consistent with a "costly search and trading relationships" hypothesis. Copyright The American Finance Association 1999.

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

Volume (Year): 54 (1999)
Issue (Month): 5 (October)
Pages: 1799-1828
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Handle: RePEc:bla:jfinan:v:54:y:1999:i:5:p:1799-1828

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Lucy F. Ackert & Bryan K. Church, 1998. "Bid-ask spreads in multiple dealer settings: Some experimental evidence," Working Paper 98-9, Federal Reserve Bank of Atlanta. [Downloadable!]
Other versions:
- Lucy F. Ackert & Bryan K. Church, 1999. "Bid-Ask Spreads in Multiple Dealer Settings: Some Experimental Evidence," Financial Management, Financial Management Association, vol. 28(1), Spring.
Reitz, Stefan & Schmidt, Markus A. & Taylor, Mark P., 2009. "Financial intermediation and the role of price discrimination in a two-tier market," Discussion Paper Series 1: Economic Studies 2009,13, Deutsche Bundesbank, Research Centre. [Downloadable!]
Other versions:
- Reitz, Stefan & Schmidt, Markus & Taylor , Mark P., 2009. "Financial Intermediation and the Role of Price Discrimination in a Two-Tier Market," MPRA Paper 15602, University Library of Munich, Germany. [Downloadable!]
Lescourret, Laurence & Robert, Christian Y., 2006. "Preferencing, internalization and inventory position," ESSEC Working Papers DR 06017, ESSEC Research Center, ESSEC Business School. [Downloadable!]

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