This paper describes regularities in the intraday spreads and prices quoted by dealers on the London Stock Exchange. It develops a measure of spread-related transaction costs, one that recognizes dealers' willingness to price trades within their quoted spreads. This measure of transaction costs shows that trading costs are systematically related to a trade's size, characteristics of the trading counterparties, and security characteristics. Customers pay the full spread on small trades while medium to large trades receive more favorable execution. Market makers only discount very large customer trades while dealers regularly discount medium to large trades. Inter-dealer trades generally receive favorable execution, and discounts increase in size. Market makers do not discount trades with each other over the phone, but do discount when trading anonymously using inter-dealer-brokers. Quoted and touch spreads are falling in the number of market makers. The rate of decline is interpreted as reflecting economies of scale in market making.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4727.
Length: Date of creation: May 1994 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:4727
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Grossman, S.J. & Miller, M.H., 1988.
"Liquidity And Market Structure,"
Papers
88, Princeton, Department of Economics - Financial Research Center.
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