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Author: Peter C. Reiss Publisher: ISBN: Category : Stock exchanges Languages : en Pages : 82
Book Description
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.
Author: Peter C. Reiss Publisher: ISBN: Category : Stock exchanges Languages : en Pages : 82
Book Description
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.
Author: Kee H. Chung Publisher: ISBN: Category : Languages : en Pages : 31
Book Description
In this study we examine the temporal dynamics of dealer market share and their ramification for competition and trading costs using a large sample of NASDAQ securities. Our results show that although the total market share of the top five dealers is relatively stable over time, there is significant monthly variation in the composition of the top five dealers. We show that market share turbulence among top dealers is another form of competition that narrows bid-ask spreads, especially for stocks with less competitive market structure.
Author: Louis H. Ederington Publisher: ISBN: Category : Languages : en Pages : 52
Book Description
Utilizing the large subset of trades in which dealers act purely as agents, we decompose dealer spreads in U.S. corporate bond OTC markets into components arising from: 1) dealers' market-making role, and 2) their role as agents for their non-dealer customers. We investigate the determinants of both components. We find that agent-related spreads are large and comparable in magnitude to market-making spreads. In their role as agents, dealers face liquidity-search and customer interface costs, while in their role as market makers they face inventory and asymmetric information costs. Consistent with this, we find that while market-making spreads are strongly correlated with market risk variables, agent-related spreads are not, depending instead on liquidity driven variables. While market-making spreads are inversely related to trade size, agent-related spreads increase with trade size before leveling off and then declining -- possibly indicating that agent-dealers devote lesser search time to relatively smaller trades. While market-making dealer spreads are positively correlated with risk variables, whether trading directly with non-dealer customers or with dealers acting purely as agents, the difference between the former and the latter is negatively correlated with risk variables implying that market-making dealers benefit more from direct interaction with traders when risk and information asymmetry is higher, consistent with dealers deriving information-related benefits from their customer interface. Except for very small trades, explicit transaction costs of non-dealer customers are lower when they trade directly with market-making dealers than when they route trades through a dealer acting purely as an agent. Finally, we show that existing studies have underestimated average overall trading costs in the corporate bond market by conflating the spreads of dealers acting purely as agents with full dealer spreads that include both agent and market making costs. Given our findings on the size and economic determinants of agent-related dealer costs, our results have significant implications for the extensive empirical literature on dealer spreads in other OTC markets.
Author: Erik Theissen Publisher: ISBN: Category : Languages : en Pages : 48
Book Description
This paper reports the results of 18 market experiments that were conducted in order to compare the call market, the continuous auction and the dealer market. The design incorporates asymmetric information but guarantees that the ex-ante quality of the private signals of all traders is identical. Therefore, the aggregation of diverse information can be analyzed in the absence of insider trading. Single transaction prices in the call and continuous auction market are found to be much more efficient than prices in the dealer market. The latter is, however, very efficient when average prices are analyzed. Averaging the prices of a trading period largely eliminates the bid-ask spread. The conclusion is therefore that prices in a dealer market convey high quality information, but at the expense of high transaction costs. The call market, although exhibiting small pricing errors, shows a systematic tendency towards underadjustment to new information. An analysis of market liquidity using various measures proposed in the literature shows that execution costs are lowest in the call market and highest in the dealer market. The analysis also reveals that both the trading volume and Roll's (1984) serial covariance estimator are inappropriate measures of execution costs in the present context. The quality of the private signals traders receive influences portfolio structure but does not influence end-of-period wealth. This result is consistent with efficient price discovery in the experimental markets.
Author: H. Kent Baker Publisher: John Wiley & Sons ISBN: 1118421485 Category : Business & Economics Languages : en Pages : 758
Book Description
A comprehensive guide to the dynamic area of finance known as market microstructure Interest in market microstructure has grown dramatically in recent years due largely in part to the rapid transformation of the financial market environment by technology, regulation, and globalization. Looking at market transactions at the most granular level—and taking into account market structure, price discovery, information flows, transaction costs, and the trading process—market microstructure also forms the basis of high-frequency trading strategies that can help professional investors generate profits and/or execute optimal transactions. Part of the Robert W. Kolb Series in Finance, Market Microstructure skillfully puts this discipline in perspective and examines how the working processes of markets impact transaction costs, prices, quotes, volume, and trading behavior. Along the way, it offers valuable insights on how specific features of the trading process like the existence of intermediaries or the environment in which trading takes place affect the price formation process. Explore issues including market structure and design, transaction costs, information flows, and disclosure Addresses market microstructure in emerging markets Covers the legal and regulatory issues impacting this area of finance Contains contributions from both experienced financial professionals and respected academics in this field If you're looking to gain a firm understanding of market microstructure, this book is the best place to start.
Author: Deniz Ozenbas Publisher: Springer Nature ISBN: 3030748170 Category : Business enterprises Languages : en Pages : 111
Book Description
This open access book addresses four standard business school subjects: microeconomics, macroeconomics, finance and information systems as they relate to trading, liquidity, and market structure. It provides a detailed examination of the impact of trading costs and other impediments of trading that the authors call rictions It also presents an interactive simulation model of equity market trading, TraderEx, that enables students to implement trading decisions in different market scenarios and structures. Addressing these topics shines a bright light on how a real-world financial market operates, and the simulation provides students with an experiential learning opportunity that is informative and fun. Each of the chapters is designed so that it can be used as a stand-alone module in an existing economics, finance, or information science course. Instructor resources such as discussion questions, Powerpoint slides and TraderEx exercises are available online.
Author: Andrew W. Lo Publisher: University of Chicago Press ISBN: 0226488497 Category : Business & Economics Languages : en Pages : 390
Book Description
The regulation of financial markets has for years been the domain of lawyers, legislators, and lobbyists. In this unique volume, experts in industrial organization, finance, and law, as well as members of regulatory agencies and the securities industry, examine the securities industry from an economic viewpoint. Ten original essays address topics including electronic trading and the "virtual"stock exchange; trading costs and liquidity on the London and Tokyo Stock Exchanges and in the German and Japanese government bond markets; international coordination among regulatory agencies; and the impact of changing margin requirements on stock prices, volatility, and liquidity. This clear presentation of groundbreaking research will appeal to economists, lawyers, and legislators who seek a refreshingly new perspective on policy issues in the securities industry.
Author: Peter C. Reiss
Author: Peter C. Reiss
Author: National Bureau of Economic Research
Author: Kee H. Chung
Author: Louis H. Ederington
Author: David Jonathan Wright
Author: Erik Theissen
Author: Robert Alan Schwartz
Author: H. Kent Baker
Author: Deniz Ozenbas
Author: Andrew W. Lo