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Preferencing, Internalization, Best Execution, and Dealer Profits
Author(s) -
Hansch Oliver,
Naik Narayan Y.,
Viswanathan S.
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00167
Subject(s) - collusion , internalization , stock (firearms) , business , sample (material) , monetary economics , stock exchange , economics , industrial organization , finance , mechanical engineering , chemistry , genetics , chromatography , cell , engineering , biology
The practices of preferencing and internalization have been alleged to support collusion, cause worse execution, and lead to wider spreads in dealership style markets relative to auction style markets. For a sample of London Stock Exchange stocks, we find that preferenced trades pay higher spreads, however they do not generate higher dealer profits. Internalized trades pay lower, not higher, spreads. We do not find a relation between the extent of preferencing or internalization and spreads across stocks. These results do not lend support to the “collusion” hypothesis but are consistent with a “costly search and trading relationships” hypothesis.