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Missing Markets: Microstructure and Liquidity on the 19th Century London Stock Exchange

Author

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  • Esteves, Rui
  • Geisler Mesevage, Gabriel

Abstract

This paper studies the behavior of specialist dealers in choosing to make markets in securities. Our setting is the 19th century London Stock Exchange and the universe of securities listed on the exchange in the 1870s. The LSE was a free-entry dealer market, where dealers were free to choose which securities to deal in. In this context, we show that up to 80% of securities were orphaned with no specialist offering immediate execution. In line with the findings of recent literature, our estimates show that specialist dealers concentrated their market-making in the most liquid securities. A combination of adverse selection and inventory costs prevented the development of liquid markets in most securities, with dealers opting instead to provide match-making services. Our findings are consistent with recent research on the possibility of liquidity bifurcation and market fragility.

Suggested Citation

  • Esteves, Rui & Geisler Mesevage, Gabriel, 2024. "Missing Markets: Microstructure and Liquidity on the 19th Century London Stock Exchange," CEPR Discussion Papers 19008, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19008
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    More about this item

    Keywords

    Microstructure; Liquidity; Bid-ask spread; London stock exchange;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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