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Price formation and transparency on the London Stock Exchange

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Author Info
Victoria Saporta
Giorgio Trebeschi
Anne Vila
Abstract

This paper contributes to the empirical market microstructure literature on the London Stock Exchange (LSE) by producing model-based estimates of the spread and its components. The paper applies the same approach to test for changes in the determinants of price formation following the January 1996 change in the market's publication rules. The results suggest that order-processing costs are a far more important determinant of the LSE spread than the literature has so far presumed. Consistent with existing research findings, no discernible effect of post-trade transparency on market liquidity was found.

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Paper provided by Bank of England in its series Bank of England working papers with number 95.

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Handle: RePEc:boe:boeewp:95

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  3. Bessembinder, Hendrik & Kaufman, Herbert M., 1997. "A Comparison of Trade Execution Costs for NYSE and NASDAQ-Listed Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 287-310, September. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
  5. Ananth Madhavan & Matthew Richardson & Mark Roomans, 1996. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-34, New York University, Leonard N. Stern School of Business-.
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  6. Leach, J Chris & Madhavan, Ananth N, 1993. "Price Experimentation and Security Market Structure," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(2), pages 375-404. [Downloadable!] (restricted)
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  7. Oliver Hansch & A Neuberger, 1996. "Strategic Trading by Market Makers on the London Stock Exchange," Archive Working Papers 013, Birkbeck, Department of Economics, Mathematics & Statistics.
  8. Stoll, Hans R, 1978. "The Supply of Dealer Services in Securities Markets," Journal of Finance, American Finance Association, vol. 33(4), pages 1133-51, September. [Downloadable!] (restricted)
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  9. Huang, Roger D & Stoll, Hans R, 1997. "The Components of the Bid-Ask Spread: A General Approach," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 995-1034.
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  13. Snell, Andy & Tonks, Ian, 1995. "Determinants of Price Quote Revisions on the London Stock Exchange," Economic Journal, Royal Economic Society, vol. 105(428), pages 77-94, January. [Downloadable!] (restricted)
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  15. Madhavan, Ananth & Smidt, Seymour, 1993. " An Analysis of Changes in Specialist Inventories and Quotations," Journal of Finance, American Finance Association, vol. 48(5), pages 1595-1628, December. [Downloadable!] (restricted)
  16. Choi, J. Y. & Salandro, Dan & Shastri, Kuldeep, 1988. "On the Estimation of Bid-Ask Spreads: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(02), pages 219-230, June. [Downloadable!]
  17. Snell, Andy & Tonks, Ian, 1998. "Testing for asymmetric information and inventory control effects in market maker behaviour on the London Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 5(1), pages 1-25, January. [Downloadable!] (restricted)
  18. Chris Leach, J. & Madhavan, Ananth N., 1992. "Intertemporal price discovery by market makers: Active versus passive learning," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 207-235, June. [Downloadable!] (restricted)
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