Market Liquidity and Trader Welfare in Multiple Dealer Markets: Evidence From Dual Trading Restrictions
Federal Reserve Bank of New York
Texas Christian University
California State University, Los Angeles - Department of Finance and Law
In the context of dual trading restrictions, we examine whether aggregate liquidity measures are appropriate indicators of trader welfare in multiple dealer markets. Consistent with our theoretical results, we show empirically that dual trading restrictions did not affect market liquidity significantly, but dual traders of above-average skills may have quit brokerage and switched to trading exclusively for their own accounts following restrictions. Further, customers of these dual-traders had lower trading costs in the period before restrictions relative to the trading costs of all customers after restrictions.
Number of Pages in PDF File: 55
JEL Classification: G12, G13, G18
Date posted: November 9, 1998