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Dealer liquidity in an auction market: evidence fom the London Stock Exchange

  • Sylvain Friederich
  • Richard Payne
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    We analyse the trade characteristics and market conditions which determine the market share of an electronic order book at the London Stock Exchange, where an \upstairs" network of dual-capacity rms is also available for trade. We hypothesise and empirically verify that execution and information risks govern the choice of execution mode. Further, we uncover strong commonality in the market share of the order book across stocks, and nd that variables proxying for market-wide liquidity and informational risks also aect the choice of trading venue. These ndings appear robust to possible endogeneity of the measures of order book liquidity. They suggest that competing, o-book liquid- ity suppliers voluntarily perform at least some of the \stabilisation" functions normally assigned to designated market-makers.

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    File URL: http://eprints.lse.ac.uk/24947/
    File Function: Open access version.
    Download Restriction: no

    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24947.

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    Length: 36 pages
    Date of creation: Aug 2002
    Date of revision:
    Handle: RePEc:ehl:lserod:24947
    Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
    Phone: +44 (020) 7405 7686
    Web page: http://www.lse.ac.uk/

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    1. Sanford J. Grossman, . "The Informational Role of Upstairs and Downstairs Trading," Rodney L. White Center for Financial Research Working Papers 22-90, Wharton School Rodney L. White Center for Financial Research.
    2. Torben Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "The Distribution of Exchange Rate Volatility," NBER Working Papers 6961, National Bureau of Economic Research, Inc.
    3. Viswanathan, S. & Wang, James J. D., 2002. "Market architecture: limit-order books versus dealership markets," Journal of Financial Markets, Elsevier, vol. 5(2), pages 127-167, April.
    4. Hans R. Stoll, 1993. "Organization Of The Stock Market: Competition Or Fragmentation?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(4), pages 89-93.
    5. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1996. " Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow," Journal of Finance, American Finance Association, vol. 51(3), pages 811-33, July.
    6. Pagano, Marco & Roell, Ailsa, 1992. "Auction and dealership markets : What is the difference?," European Economic Review, Elsevier, vol. 36(2-3), pages 613-623, April.
    7. Seppi, Duane J, 1990. " Equilibrium Block Trading and Asymmetric Information," Journal of Finance, American Finance Association, vol. 45(1), pages 73-94, March.
    8. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
    9. Brian F. Smith, 2001. "Upstairs Market for Principal and Agency Trades: Analysis of Adverse Information and Price Effects," Journal of Finance, American Finance Association, vol. 56(5), pages 1723-1746, October.
    10. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    11. Madhavan, Ananth, 1992. " Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-41, June.
    12. Blume, Marshall E & MacKinley, A Craig & Terker, Bruce, 1989. " Order Imbalances and Stock Price Movements on October 19 and 20, 1987," Journal of Finance, American Finance Association, vol. 44(4), pages 827-48, September.
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