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A theoretical analysis of institutional investors' trading costs in auction and dealer markets

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  • Andy Snell
  • Ian Tonks

Abstract

This paper compares trading costs for institutional investors subject to liquidity shocks, in auction and dealer markets. The batch auction restricts the institutions' ability to exploit informational advantages because of competition between institutions when they simultaneously submit orders. This competition lowers aggregate trading costs. In the dealership market, competition between traders is absent but private information is revealed by observing the flow of successive orders and so reduces aggregate trading costs. We analyse the relative effects on trading costs of competition and information revelation in the two systems and derive a parameter inequality which determines which system has lower costs. Copyright 2003 Royal Economic Society.

Suggested Citation

  • Andy Snell & Ian Tonks, 2003. "A theoretical analysis of institutional investors' trading costs in auction and dealer markets," Economic Journal, Royal Economic Society, vol. 113(489), pages 576-597, July.
    • Handle: RePEc:ecj:econjl:v:113:y:2003:i:489:p:576-597
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    Cited by:

    1. Angelidis, Timotheos & Andrikopoulos, Andreas, 2010. "Idiosyncratic risk, returns and liquidity in the London Stock Exchange: A spillover approach," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 214-221, June.
    2. Alzahrani, Ahmed A. & Gregoriou, Andros & Hudson, Robert, 2012. "Can market frictions really explain the price impact asymmetry of block trades? Evidence from the Saudi Stock Market," Emerging Markets Review, Elsevier, vol. 13(2), pages 202-209.
    3. Gernot Hinterleitner & Philipp Hornung & Ulrike Leopold-Wildburger & Roland Mestel & Stefan Palan, 2012. "A Good Beginning Makes a Good Market: The Effect of Different Market Opening Structures on Market Quality," Working Paper Series, Social and Economic Sciences 2012-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    4. Hung‐Neng Lai, 2007. "The Market Quality of Dealer versus Hybrid Markets: The Case of Moderately Liquid Securities," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 349-373, January.
    5. Isa E. Hafalir & Serkan Imisiker, 2022. "Call Auctions with Contingent Orders," Games, MDPI, vol. 13(5), pages 1-8, September.

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