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Internalization And Market Quality: An Empirical Investigation

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  • Norris L. Larrymore
  • Albert J. Murphy

Abstract

We explore the relation between market quality and internalization through a pre‐ and postenactment analysis of the implementation of the Toronto Stock Exchange (TSE) Price Improvement Rule on October 26, 1998. We find that the rule revision is accompanied by falls in the bid–ask spread and the variance of the pricing error and by rising internalization rates. This study informs proponents of market concentration, brokers, dealers, exchange administrators, and market regulators that a judicious regime of regulated internalization may be associated with superior market effectiveness.

Suggested Citation

  • Norris L. Larrymore & Albert J. Murphy, 2009. "Internalization And Market Quality: An Empirical Investigation," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(3), pages 337-363, September.
    • Handle: RePEc:bla:jfnres:v:32:y:2009:i:3:p:337-363
    DOI: 10.1111/j.1475-6803.2009.01253.x
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    References listed on IDEAS

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    1. Upson, James & Van Ness, Robert A., 2017. "Multiple markets, algorithmic trading, and market liquidity," Journal of Financial Markets, Elsevier, vol. 32(C), pages 49-68.

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