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Liquidity and Competition in Unregulated Markets

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  • Caroline Fohlin
  • Thomas Gehrig
  • Tobias Brünner

Abstract

Despite reputedly widespread market manipulation and insider trading, we find surprisingly high liquidity and low transactions costs for actively traded securities on the NYSE between 1890 and 1910, decades before SEC regulation. Moreover, market makers behave largely as predicted in theory: stocks with liquid markets and competitive market makers (cross-trading at the rival Consolidated Exchange) trade with substantially lower quoted bid-ask spreads and with less anti-competitive behavior (price discreteness). Effective spreads, illiquidity, and volume all improve monotonically over time. Notably, the asymmetric information component of effective spreads increases in relative and absolute terms from 1900 to 1910.

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File URL: http://www.carloalberto.org/assets/working-papers/no.101.pdf
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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 101.

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Length: 50 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:cca:wpaper:101

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