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Transaction Costs in Dealer Markets: Evidence From The London Stock Exchange

  • Peter C. Reiss
  • Ingrid M. Werner
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    This paper describes regularities in the intraday spreads and prices quoted by dealers on the London Stock Exchange. It develops a measure of spread-related transaction costs, one that recognizes dealers' willingness to price trades within their quoted spreads. This measure of transaction costs shows that trading costs are systematically related to a trade's size, characteristics of the trading counterparties, and security characteristics. Customers pay the full spread on small trades while medium to large trades receive more favorable execution. Market makers only discount very large customer trades while dealers regularly discount medium to large trades. Inter-dealer trades generally receive favorable execution, and discounts increase in size. Market makers do not discount trades with each other over the phone, but do discount when trading anonymously using inter-dealer-brokers. Quoted and touch spreads are falling in the number of market makers. The rate of decline is interpreted as reflecting economies of scale in market making.

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    File URL: http://www.nber.org/papers/w4727.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4727.

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    Date of creation: May 1994
    Date of revision:
    Publication status: published as The Industrial Organization and Regulation of the Securities Industry, Andrew Lo, ed. University of Chicago Press, 1996. ISBN# 0-226-48847-0, pp. 125
    Handle: RePEc:nbr:nberwo:4727
    Note: AP IO
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    4. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
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    13. repec:dgr:kubcen:199329 is not listed on IDEAS
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    17. de Jong, F.C.J.M. & Nijman, T.E. & Roell, A.A., 1993. "A comparison of the cost of trading French shares on the Paris Bourse and on SEAQ International," Discussion Paper 1993-29, Tilburg University, Center for Economic Research.
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