Transaction Costs in Dealer Markets: Evidence from the London Stock Exchange

67 Pages Posted: 30 Sep 2009 Last revised: 4 Dec 2022

See all articles by Peter C. Reiss

Peter C. Reiss

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Ingrid M. Werner

The Ohio State University - Fisher College of Business

Date Written: May 1994

Abstract

This paper describes regularities in the intraday spreads and prices quoted by dealers on the London Stock Exchange. It develops a measure of spread-related transaction costs, one that recognizes dealers' willingness to price trades within their quoted spreads. This measure of transaction costs shows that trading costs are systematically related to a trade's size, characteristics of the trading counterparties, and security characteristics. Customers pay the full spread on small trades while medium to large trades receive more favorable execution. Market makers only discount very large customer trades while dealers regularly discount medium to large trades. Inter-dealer trades generally receive favorable execution, and discounts increase in size. Market makers do not discount trades with each other over the phone, but do discount when trading anonymously using inter-dealer-brokers. Quoted and touch spreads are falling in the number of market makers. The rate of decline is interpreted as reflecting economies of scale in market making.

Suggested Citation

Reiss, Peter C. and Werner, Ingrid M., Transaction Costs in Dealer Markets: Evidence from the London Stock Exchange (May 1994). NBER Working Paper No. w4727, Available at SSRN: https://ssrn.com/abstract=1480523

Peter C. Reiss (Contact Author)

Stanford Graduate School of Business ( email )

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Ingrid M. Werner

The Ohio State University - Fisher College of Business ( email )

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