INTERNALIZATION AND MARKET QUALITY: AN EMPIRICAL INVESTIGATION

Norris L. Larrymore and Albert J. Murphy

Journal of Financial Research, 2009, vol. 32, issue 3, 337-363

Abstract: We explore the relation between market quality and internalization through a pre‐ and postenactment analysis of the implementation of the Toronto Stock Exchange (TSE) Price Improvement Rule on October 26, 1998. We find that the rule revision is accompanied by falls in the bid–ask spread and the variance of the pricing error and by rising internalization rates. This study informs proponents of market concentration, brokers, dealers, exchange administrators, and market regulators that a judicious regime of regulated internalization may be associated with superior market effectiveness.

Date: 2009
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https://doi.org/10.1111/j.1475-6803.2009.01253.x

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