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Price Improvement in Dealership Markets

Author

Listed:
  • Matthew Rhodes-Kropf

    (Graduate School of Business, Columbia University)

Abstract

Price improvement refers to the practice whereby dealers offer executions that improve on quoted prices. Why are these improvements given? Standard thinking is that competition causes dealers to give better prices to customers with less information. This paper contrasts this with a novel theory in which customers negotiate improvements and differential pricing arises from differences in customers' market power. Each theory affects the formation of bid/ask spreads in empirically distinguishable ways. Understanding price improvement and its impact on market participants is critical the regulation of markets, particularly since equal execution is such an important stated goal of the SEC.

Suggested Citation

  • Matthew Rhodes-Kropf, 2005. "Price Improvement in Dealership Markets," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1137-1172, July.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:4:p:1137-1172
    DOI: 10.1086/430857
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    Citations

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    Cited by:

    1. Grammig, Joachim & Schiereck, Dirk & Theissen, Erik, 2001. "Knowing me, knowing you: : Trader anonymity and informed trading in parallel markets," Journal of Financial Markets, Elsevier, vol. 4(4), pages 385-412, October.
    2. G. Desgranges & T. Foucault, 2001. "Price Improvements in Financial Markets as a Screening Device," THEMA Working Papers 2001-06, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    3. Kaun Y. Lee & Kee H. Chung, 2009. "Information-Based Trading and Price Improvement," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 754-773.
    4. DESGRANGES, Gabriel & FOUCAULT, Thierry, 2000. "Reputation-based pricing and price improvements in dealership markets," HEC Research Papers Series 716, HEC Paris, revised 01 Mar 2002.
    5. Kaun Y. Lee & Kee H. Chung, 2009. "Information‐Based Trading and Price Improvement," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5‐6), pages 754-773, June.
    6. Chung, Kee H. & Chuwonganant, Chairat & McCormick, D. Timothy, 2004. "Order preferencing and market quality on NASDAQ before and after decimalization," Journal of Financial Economics, Elsevier, vol. 71(3), pages 581-612, March.
    7. Lescourret, Laurence & Robert, Christian Y., 2011. "Transparency matters: Price formation in the presence of order preferencing," Journal of Financial Markets, Elsevier, vol. 14(2), pages 227-258, May.
    8. Bessembinder, Hendrik & Venkataraman, Kumar, 2004. "Does an electronic stock exchange need an upstairs market?," Journal of Financial Economics, Elsevier, vol. 73(1), pages 3-36, July.
    9. Ramiro Losada López, 2009. "Could regulation of the ABS secondary market improve social welfare?," CNMV Working Papers CNMV Working Papers no. 3, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    10. Lescourret, Laurence & Robert, Christian Y., 2006. "Preferencing, internalization and inventory position," ESSEC Working Papers DR 06017, ESSEC Research Center, ESSEC Business School.
    11. Brad Bachu & Xin Wan & Ciamac C. Moallemi, 2024. "Quantifying Price Improvement in Order Flow Auctions," Papers 2405.00537, arXiv.org, revised May 2024.

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