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

Peter C. Reiss and Ingrid M. Werner

No 4727, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: C G (search for similar items in EconPapers)
Date: 1994-05
Note: AP IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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
Published as Transaction Costs in Dealer Markets: Evidence from the London Stock Exchange , Peter C. Reiss, Ingrid M. Werner. in The Industrial Organization and Regulation of the Securities Industry , Lo. 1996

Downloads: (external link)
http://www.nber.org/papers/w4727.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4727

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4727

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().