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THE RELATIONSHIP BETWEEN OTC BID‐ASK SPREADS AND DEALER SIZE: THE IMPACT OF ORDER‐PROCESSING AND DIVERSIFICATION COSTS
Author(s) -
Tripathy Niranjan,
Peterson Richard L.
Publication year - 1991
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1991.tb00650.x
Subject(s) - business , diversification (marketing strategy) , bid price , clearing , order (exchange) , ask price , monetary economics , purchasing , stock (firearms) , tender offer , bid–ask spread , commerce , economics , stock exchange , finance , marketing , mechanical engineering , engineering , corporate governance , shareholder
The effects of large transactions on OTC security dealers' bid‐ask spreads are analyzed for stocks with different price levels. Because overhead expenses vary little with the value of transactions, economies of scale exist for dealers in higher‐priced stocks. Thus, percentage bid‐ask spreads decline with the price level of the stock. However, larger transactions entail larger order‐clearing and inventory‐adjustment costs. These costs may be particularly burdensome for smaller dealers with limited purchasing powers and abilities to diversify inexpensively. Consequently, smaller dealers charge higher spreads for trading high‐priced stocks.