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The Profitability of Block Trades in Auction and Dealer Markets

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Abstract

The 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.

Suggested Citation

  • Andy Snell & Ian Tonks, 1998. "The Profitability of Block Trades in Auction and Dealer Markets," ESE Discussion Papers 9, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:9
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    File URL: http://www.econ.ed.ac.uk/papers/id9_esedps.pdf
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    Keywords

    market microstructure; auction market; dealer markets;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other

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