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Preferencing, Internalization, Best Execution, and Dealer Profits


  • Oliver Hansch

    (Pennsylvania State University,)

  • Narayan Y. Naik

    (London Business School,)

  • S. Viswanathan

    (Fuqua School of Business, Duke University)


The practices of preferencing and internalization have been alleged to support collusion, cause worse execution, and lead to wider spreads in dealership style markets relative to auction style markets. For a sample of London Stock Exchange stocks, we find that preferenced trades pay higher spreads, however they do not generate higher dealer profits. Internalized trades pay lower, not higher, spreads. We do not find a relation between the extent of preferencing or internalization and spreads across stocks. These results do not lend support to the "collusion" hypothesis but are consistent with a "costly search and trading relationships" hypothesis. Copyright The American Finance Association 1999.

Suggested Citation

  • Oliver Hansch & Narayan Y. Naik & S. Viswanathan, 1999. "Preferencing, Internalization, Best Execution, and Dealer Profits," Journal of Finance, American Finance Association, vol. 54(5), pages 1799-1828, October.
  • Handle: RePEc:bla:jfinan:v:54:y:1999:i:5:p:1799-1828

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    References listed on IDEAS

    1. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 905-939.
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