Dealer Liquidity in an Auction Market: Evidence from the London Stock Exchange

36 Pages Posted: 20 Dec 2002

See all articles by Sylvain Friederich

Sylvain Friederich

London School of Economics & Political Science (LSE) - Financial Markets Group

Richard Payne

City University London - The Business School

Date Written: August 30, 2002

Abstract

We analyse the trade characteristics and market conditions which determine the market share of an electronic order book at the London Stock Exchange, where an "upstairs" network of dual-capacity firms is also available for trade. We hypothesize and empirically verify that execution and information risks govern the choice of execution mode. Further, we uncover strong commonality in the market share of the order book across stocks, and find that variables proxying for market-wide liquidity and informational risks also affect the choice of trading venue.

These findings appear robust to possible endogeneity of the measures of order book liquidity. They suggest that competing, off-book liquidity suppliers voluntarily perform at least some of the "stabilisation" functions normally assigned to designated market-makers.

Keywords: limit order trading, auction and dealership markets, commonality, London Stock Exchange

Suggested Citation

Friederich, Sylvain and Payne, Richard G., Dealer Liquidity in an Auction Market: Evidence from the London Stock Exchange (August 30, 2002). Available at SSRN: https://ssrn.com/abstract=348080 or http://dx.doi.org/10.2139/ssrn.348080

Sylvain Friederich (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7893 (Phone)
+44 20 7852 3580 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/people/friederich/index.html

Richard G. Payne

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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