Preferencing, Internalization, Best Execution, and Dealer Profits
Posted: 8 Aug 1998
The practices of preferencing and internalization have been alleged to support collusion, cause worse execution and lead to wider spreads in dealership style markets relative to auction style markets. For a sample of London Stock Exchange stocks, we find that preferenced trades pay higher spreads, however, they do not generate higher dealer profits. Internalized trades pay lower, not higher, spreads. We do not find a relation between the extent of preferencing or internalization, and spreads across stocks. These results do not lend support to the "collusion" hypothesis but are consistent with a "costly search and trading relationships" hypothesis.
JEL Classification: G10, D4
Suggested Citation: Suggested Citation