The Profitability of Block Trades in Auction and Dealer Markets

Andy Snell and Ian Tonks

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

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.

Keywords: market microstructure; auction market; dealer markets (search for similar items in EconPapers)
JEL-codes: G10 G15 G19 (search for similar items in EconPapers)
Pages: 15
Date: 1998-10
New Economics Papers: this item is included in nep-fin and nep-fmk
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http://www.econ.ed.ac.uk/papers/id9_esedps.pdf

Related works:
Working Paper: The profitability of block trades in auction and dealer markets (2000)
Working Paper: The Profitability of Block Trades Auction and Dealer Markets (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:9

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