Trading Frictions and Market Structure: An Empirical Analysis

17 Pages Posted: 22 Apr 2008  

Charlie X. Cai

University of Bradford - School of Management

David Hillier

University of Strathclyde - Department of Accounting and Finance

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Date Written: 2007-09

Abstract

Market structure affects the informational and real frictions faced by traders in equity markets. Using bid-ask spreads, we present evidence which suggests that while real frictions associated with the costs of supplying immediacy are less in order-driven systems, informational frictions resulting from increased adverse selection risk are considerably higher in these markets. Firm value, transaction size and order location are all major determinants of the trading costs borne by investors. Consistent with the stealth trading hypothesis of Barclay and Warner (1993), we report that informational frictions are at their highest for medium size trades that go through the order book. Finally, while there is no doubt that the total costs of trading on order-driven systems are lower for very liquid securities, the inherent informational inefficiencies of the trading format should not be ignored. This is particularly true for the vast majority of small to mid-size stocks that experience infrequent trading and low transaction volume.

Suggested Citation

Cai, Charlie X. and Hillier, David and Keasey, Kevin, Trading Frictions and Market Structure: An Empirical Analysis (2007-09). Journal of Business Finance & Accounting, Vol. 35, Issue 3-4, pp. 563-579, April/May 2008. Available at SSRN: https://ssrn.com/abstract=1122931 or http://dx.doi.org/10.1111/j.1468-5957.2008.02076.x

Charlie X. Cai (Contact Author)

University of Bradford - School of Management ( email )

Emm Lane
Bradford, West Yorkshire Bd9 4JL
United Kingdom

David Hillier

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom
44 0141 330 4809 (Phone)
44 0141 330 4442 (Fax)

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

Paper statistics

Downloads
2
Abstract Views
577