Disclosure Regulation in Competitive Dealership Markets: Analysis of the London Stock Exchange

London Business School Institute of Finance and Accounting Working Paper 193

Posted: 4 Nov 1998

See all articles by Narayan Y. Naik

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

S. Viswanathan

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

Anthony Neuberger

City University London - Faculty of Finance

Abstract

This paper presents a two stage trading model of a competitive dealership market. In the first stage, one among a group of risk averse market makers executes a public trade which contains some information. Details of this trade are not publicly disclosed. In the second stage, an inter-dealer market allows the market maker to offset her inventory position and exploit the information contained in the public order by trading with the other market makers. We show that the price of a trade in such a market depends in a nonlinear way on the informativeness and the size of the trade. We also show that public disclosure of trades in the first stage reveals the information contained in the trade and thus radically alters the structure of the market. We use our model to compare the competitive dealership market (with and without public disclosure) with the standard auction type market and to address some of the issues raised in the continuing public disclosure controversy at the London Stock Exchange.

JEL Classification: G15

Suggested Citation

Naik, Narayan Y. and Viswanathan, S. and Neuberger, Anthony, Disclosure Regulation in Competitive Dealership Markets: Analysis of the London Stock Exchange. London Business School Institute of Finance and Accounting Working Paper 193. Available at SSRN: https://ssrn.com/abstract=6262

Narayan Y. Naik (Contact Author)

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

Sussex Place
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London NW1 4SA
United Kingdom
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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

Anthony Neuberger

City University London - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

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