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Trading Costs of Institutional Investors in Auction and Dealer Markets

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Abstract

This paper compares the trading costs for institutional investors who are subject to liquidity shocks, of trading 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 their orders. This competition lowers aggregate trading costs. In the dealership market, competition between traders is absent but trades occur in sequence so that private information is revealed by observing the flow of successive orders. This information revelation reduces trading costs in aggregate. We analyse the relative effects on profits of competition in one system and information revelation in the other and identify the circumstances under which dealership markets have lower trading costs than auction markets and vice versa.

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  • Andy Snell & Ian Tonks, 2002. "Trading Costs of Institutional Investors in Auction and Dealer Markets," Edinburgh School of Economics Discussion Paper Series 89, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:89
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    1. Carl Shapiro, 1986. "Exchange of Cost Information in Oligopoly," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(3), pages 433-446.
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