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The profitability of block trades in auction and dealer markets

Author

Listed:
  • Snell, Andy
  • Tonks, Ian

Abstract

The paper compares the trading costs for institutional investors who are subject to liquidity shocks, of trading in auction and dealer markets. The batch auction restricts the institutions' ability to exploit informational advantages because of competition between institutions when they simultaneously submit their orders. This competition lowers aggregate trading costs. In the dealership market, competition between traders is absent but trades occur in sequence so that private information is revealed by observing the flow of successive orders. The information revelation reduces trading costs in aggregate. We analyse the relative effects on profits of competition in one system and information revelation in the other and identify the circumstances under which dealership markets have lower trading costs than auction markets and vice versa.

Suggested Citation

  • Snell, Andy & Tonks, Ian, 2000. "The profitability of block trades in auction and dealer markets," LSE Research Online Documents on Economics 119109, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119109
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    File URL: http://eprints.lse.ac.uk/119109/
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    Keywords

    market microstructure; auction market; dealer markets;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other

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