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Search Costs: The Neglected Spread Component

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  • Flood, Mark D.
  • Huisman, Ronald
  • Koedijk, Kees G.
  • Lyons, Richard K.

Abstract

Dealers need to search for quotes in many of the world's largest markets (such as spot foreign exchange, US government bonds, and the London Stock Exchange). This search affects trading cost. We estimate the share of total trading cost attributable to search. Our experiments show that the share is large -- roughly one-third of the effective spread. Past work on estimating spread components typically omits the search component. Our estimates suggest this omission is important.

Suggested Citation

  • Flood, Mark D. & Huisman, Ronald & Koedijk, Kees G. & Lyons, Richard K., 2012. "Search Costs: The Neglected Spread Component," Research Program in Finance, Working Paper Series qt5q05g9pt, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  • Handle: RePEc:cdl:rpfina:qt5q05g9pt
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    Cited by:

    1. Yin-Wong Cheung & Menzie D. Chinn & Ian W. Marsh, 2004. "How do UK-based foreign exchange dealers think their market operates?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 289-306.
    2. Toni Gravelle, 1999. "Liquidity of the Government of Canada Securities Market: Stylised Facts and Some Market Microstructure Comparisons to the United States Treasury Market," CGFS Papers chapters,in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-37 Bank for International Settlements.
    3. Rodolfo Apreda, 2003. "On the Extent of Arbitrage Constraints within Transaction Algebras (A non-standard approach)," CEMA Working Papers: Serie Documentos de Trabajo. 239, Universidad del CEMA.
    4. Rudy De Winne & Christophe Majois, 2003. "A comparison of alternative spread décomposition models on Euronext Brussels," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 46(4), pages 91-136.
    5. Rodolfo Apreda, 2001. "The Brokerage of Asymmetric Information," CEMA Working Papers: Serie Documentos de Trabajo. 190, Universidad del CEMA.
    6. Yalin Gündüz & Torsten Lüdecke & Marliese Uhrig-Homburg, 2007. "Trading Credit Default Swaps via Interdealer Brokers," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(3), pages 141-159, December.

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    Keywords

    trading cost; traders; quotes;

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