In adverse-selection models of security market microstructure, a market maker could enhance efficiency if he or she were willing to sustain short-term trading losses. We show that this desirable activity can be supported as a self-enforcing agreement between broker-dealers and long-lived clients. An implication is that brokers who sustain such losses should charge higher fees to long-term clients for trades where the broker merely receives a commission. This prediction is supported by an analysis of brokerage rates on the Australian Stock Exchange. By contrast, market makers who make trading profits charge lower agency fees to large, long-term clients. Copyright 1995 by University of Chicago Press.
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Article provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 68 (1995) Issue (Month): 1 (January) Pages: 1-33 Download reference. The following formats are available: HTML
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