Preferencing, Internalization, Best Execution, and Dealer Profits

Posted: 8 Aug 1998

See all articles by Oliver Hansch

Oliver Hansch

Pennsylvania State University

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Multiple version iconThere are 2 versions of this paper

Abstract

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

Hansch, Oliver and Viswanathan, S. and Naik, Narayan Y., Preferencing, Internalization, Best Execution, and Dealer Profits. Journal of Finance. Available at SSRN: https://ssrn.com/abstract=100309

Oliver Hansch

Pennsylvania State University ( email )

609C Business Administration Building
University Park, PA 16802
United States

S. Viswanathan

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-7784 (Phone)
919-684-2818 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Narayan Y. Naik (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

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