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Dealer liquidity in an auction market: evidence fom the London Stock Exchange

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  • Richard Payne
  • Sylvain Friederich

Abstract

We analyse the trade characteristics and market conditions which determine the market share of an electronic order book at the London Stock Exchange, where an upstairs¶ network of dual-capacity firms is also available for trade. We hypothesise and empirically verify that execution and information risks govern the choice of execution mode. Further, we uncover strong commonality in the market share of the order book across stocks, and that variables proxying for market-wide liquidity and informational risks also affect the choice of trading venue. These findings appear robust to possible endogeneity of the measures of order book liquidity. They suggest that competing, off-book liquidity suppliers voluntarily perform at least some of the stabilisation¶ functions normally assigned to designated market-makers.

Suggested Citation

  • Richard Payne & Sylvain Friederich, 2002. "Dealer liquidity in an auction market: evidence fom the London Stock Exchange," FMG Discussion Papers dp427, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp427
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    2. Patricia L. Chelley†Steeley, 2015. "The Role of Pre†Existing Liquidity in Determining Pricing Efficiency and Liquidity Gains Following the Introduction of SETSmm," European Financial Management, European Financial Management Association, vol. 21(2), pages 360-376, March.
    3. Angelo Carollo & Gabriella Vaglica & Fabrizio Lillo & Rosario N. Mantegna, 2012. "Trading activity and price impact in parallel markets: SETS vs. off-book market at the London Stock Exchange," Quantitative Finance, Taylor & Francis Journals, vol. 12(4), pages 517-530, November.
    4. Verousis, Thanos & ap Gwilym, Owain, 2013. "Trade size clustering and the cost of trading at the London Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 91-102.
    5. Rossitsa Yalamova, 2012. "Fractal Measures in Market Microstructure Research," Multinational Finance Journal, Multinational Finance Journal, vol. 16(1-2), pages 137-154, March - J.
    6. Flepp, Raphael & Nüesch, Stephan & Franck, Egon, 2017. "The liquidity advantage of the quote-driven market: Evidence from the betting industry," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 306-317.
    7. Marsh, Ian W. & Payne, Richard, 2012. "Banning short sales and market quality: The UK’s experience," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1975-1986.
    8. Ibikunle, Gbenga, 2018. "Trading places: Price leadership and the competition for order flow," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 178-200.
    9. Peter Gomber & Satchit Sagade & Erik Theissen & Moritz Christian Weber & Christian Westheide, 2017. "Competition Between Equity Markets: A Review Of The Consolidation Versus Fragmentation Debate," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 792-814, July.
    10. Joel Fabre & Alex Frino, 2004. "Commonality in liquidity: Evidence from the Australian Stock Exchange," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 44(3), pages 357-368, November.
    11. Sensoy, Ahmet, 2017. "Firm size, ownership structure, and systematic liquidity risk: The case of an emerging market," Journal of Financial Stability, Elsevier, vol. 31(C), pages 62-80.
    12. Iwatsubo, Kentaro & Rhee, S. Ghon & Zhang, Ye Zhou, 2023. "Dealership versus continuous auction: Evidence from the JASDAQ market," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    13. Suchismita Mishra & Le Zhao, 2021. "Order Routing Decisions for a Fragmented Market: A Review," JRFM, MDPI, vol. 14(11), pages 1-32, November.
    14. Ibikunle, Gbenga, 2015. "Opening and closing price efficiency: Do financial markets need the call auction?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 208-227.
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    16. Hung-Neng Lai, 2007. "The Market Quality of Dealer versus Hybrid Markets: The Case of Moderately Liquid Securities," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1-2), pages 349-373.

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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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