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Why Do Larger Orders Receive Discounts on the London Stock Exchange?

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Author Info

  • Dan Bernhardt
  • Vladimir Dvoracek
  • Eric Hughson
  • Ingrid M. Werner

Abstract

We argue that competition between dealers in a classic dealer market is intertemporal: A trader identifies a particular dealer and negotiates a final price with only the intertemporal threat to switch dealers imposing pricing discipline on the dealer. In this kind of market structure, we show that dealers will offer greater price improvement to more regular customers, and, in turn, these customers optimally choose to submit larger orders. Hence, price improvement and trade size should be negatively correlated in a dealer market. We confirm our model's predictions using unique data from the London Stock Exchange during 1991. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhi002
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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 18 (2005)
Issue (Month): 4 ()
Pages: 1343-1368

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Handle: RePEc:oup:rfinst:v:18:y:2005:i:4:p:1343-1368

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Web: http://www4.oup.co.uk/revfin/subinfo/

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Citations

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Cited by:
  1. 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.
  2. Biais, Bruno & Green, Richard, 2007. "The Microstructure of the Bond Market in the 20th Century," IDEI Working Papers 482, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Carol Osler, 2012. "Market Microstructure and the Profitability of Currency Trading," Working Papers 48, Brandeis University, Department of Economics and International Businesss School.
  4. Desgranges, Gabriel & Foucault, Thierry, 2005. "Reputation-based pricing and price improvements," Journal of Economics and Business, Elsevier, vol. 57(6), pages 493-527.
  5. Carol Osler & Thang Nguyen & Tanseli Savaser, 2011. "Asymmetric Information and the Foreign-Exchange Trades of Global Custody Banks," Department of Economics Working Papers 2011-11, Department of Economics, Williams College.
  6. Ramadorai, Tarun, 2006. "Persistence, Performance and Prices in Foreign Exchange Markets," CEPR Discussion Papers 5861, C.E.P.R. Discussion Papers.
  7. 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.
  8. Tarun Ramadorai, 2008. "What determines transaction costs in foreign exchange markets?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 14-25.
  9. Ana Babus, 2011. "Strategic Relationships in Over-the-Counter Markets," 2011 Meeting Papers 1405, Society for Economic Dynamics.
  10. Desgranges, Gabriel & Foucault, Thierry, 2002. "Reputation-Based Pricing and Price Improvements in Dealership Markets," CEPR Discussion Papers 3359, C.E.P.R. Discussion Papers.
  11. Amy K Edwards, 2006. "Corporate bond market microstructure and transparency - the US experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Developing corporate bond markets in Asia, volume 26, pages 31-38 Bank for International Settlements.
  12. Malay Dey & Hossein Kazemi, 2008. "Bid ask spread in a competitive market with institutions and order size," Review of Quantitative Finance and Accounting, Springer, vol. 30(4), pages 433-453, May.

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