Hostname: page-component-76fb5796d-wq484 Total loading time: 0 Render date: 2024-04-27T04:00:29.931Z Has data issue: false hasContentIssue false
  • English
  • Français

Information-Based Trading in Dealer and Auction Markets: An Analysis of Exchange Listings

Published online by Cambridge University Press:  06 April 2009

Hans G. Heidle  and
Roger D. Huang
Hans G. Heidle
Affiliation:
hheidle@nd.edu, Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556.
Roger D. Huang
Affiliation:
rhuang@nd.edu. Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556.
Get access Rights & Permissions [Opens in a new window]

Abstract

Are auction markets or dealer markets better able to identify informed traders? Our analysis of firms that transfer to an alternative exchange structure indicates that traders are more anonymous in a competing dealer market than in an auction environment. Our evidence also shows that the associated changes in the probability of trading with an informed trader are related to changes in the bid-ask spread. The reduction in bid-ask spreads is more pronounced for firms with higher probability of transacting with an informed trader prior to the relocation from a dealer to an auction market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 3 , September 2002 , pp. 391 - 424
Copyright
Copyright © School of Business Administration, University of Washington 2002

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Benveniste, L. M.; Marcus, A. J.; and Wilhelm, W. J.. “What's Special about the Specialist?” Journal of Financial Economics, 32 (1992), 61–86.CrossRefGoogle Scholar
Bessembinder, H. “Trading Costs and Return Volatility: Evidence from Exchange Listings.” NYSE Working Paper 98–02, New York Stock Exchange (1998).Google Scholar
Bessembinder, H., and Kaufman, H. M.. “A Comparison of Trade Execution Costs for NYSE and NASDAQ-Listed Stocks.” Journal of Financial and Quantitative Analysis, 32 (1997), 287–310.CrossRefGoogle Scholar
Campbell, J. Y.; Lo, A. W.; and MacKinlay, A. C.. The Econometrics of Financial Markets. Princeton, NJ: Princeton Univ. Press (1997).CrossRefGoogle Scholar
Christie, W. G., and Huang, R. D.. “Market Structure and Liquidity: A Transaction Data Study of Exchange Listings.” Journal of Financial Intermediation, 3 (1994), 300–326.CrossRefGoogle Scholar
Christie, W. G., and Schultz, P. H.. “Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?” Journal of Finance, 49 (1994), 1813–1840.Google Scholar
Copeland, T. E., and Galai, D.. “Information Effects on the Bid-Ask Spread.” Journal of Finance, 38 (1983), 1457–1469.Google Scholar
Easley, D.; Kiefer, N. M.; and O'Hara, M.. “Cream-Skimming or Profit-Sharing?: The Curious Role of Purchased Order Flow.” Journal of Finance, 51 (1996), 811–834.Google Scholar
Easley, D.; “One Day in the Life of a Very Common Stock.” Review of Financial Studies, 10 (1997a), 805–835.CrossRefGoogle Scholar
Easley, D.;. Kiefer, N. M.; and O'Hara, M.. “Pooling or Separating Equilibria in Financial Markets? Evidence from Oil Stocks.” Working Paper, Cornell Univ. (1997b).Google Scholar
Easley, D.; Kiefer, N. M.; O'Hara, M.; and Paperman, J. B.. “Liquidity, Information, and Infrequently Traded Stocks.” Journal of Finance, 51 (1996), 1405–1436.CrossRefGoogle Scholar
Easley, D., and O'Hara, M.. “Price, Trade Size and Information in Securities Markets.” Journal of Financial Economics, 19 (1987), 69–90.CrossRefGoogle Scholar
Easley, D., and O'Hara, M.. “Time and the Process of Security Price Adjustment.” Journal of Finance, 47 (1992), 577–605.CrossRefGoogle Scholar
Easley, D.; O'Hara, M.; and Saar, G.. “How Stock Splits Affect Trading: A Microstructure Approach.” Journal of Financial and Quantitative Analysis, 36 (2001), 25–51.CrossRefGoogle Scholar
Easley, D.; O'Hara, M.; and Srinivas, P. S.. “Option Volume and Stock Prices: Evidence on where Informed Traders Trade.” Journal of Finance, 53 (1998), 431–465.CrossRefGoogle Scholar
Garfinkel, J. A., and Nimalendran, M.. “Market Structure and Trader Anonymity: An Analysis of Insider Trading.” Working Paper, Securities and Exchange Commission (1998).Google Scholar
Glosten, L. R. “Insider Trading, Liquidity, and the Role of the Monopolist Specialist.” Journal of Business, 62 (1989), 211–235.CrossRefGoogle Scholar
Glosten, L. R., and Milgrom, P. R.. “Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.” Journal of Financial Economics, 14 (1985), 71–100.CrossRefGoogle Scholar
Grossman, S. J. “On the Efficiency of Competitive Stock Markets where Traders Have Diverse Information.” Journal of Finance, 31 (1976), 573–585.CrossRefGoogle Scholar
Grossman, S. J., and Stiglitz, J. E.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (1980), 393–408.Google Scholar
Hasbrouck, J. “Trades, Quotes, Inventories, and Information.” Journal of Financial Economics, 22 (1988), 229–252.CrossRefGoogle Scholar
Ho, T. S. Y., and Stoll, H. R.. “The Dynamics of Dealer Markets under Competition.” Journal of Finance, 38 (1983), 1053–1074.CrossRefGoogle Scholar
Huang, R. D., and Stoll, H. R.. “Dealer versus Auction Markets: A Paired Comparison of Execution Costs on NASDAQ and the NYSE.” Journal of Financial Economics, 41 (1996), 313–357.CrossRefGoogle Scholar
Huang, R. D., and Stoll, H. R.. “Tick Size, Bid-Ask Spreads and Market Structures.” Journal of Financial and Quantitative Analysis, 36 (2001), 503–522.CrossRefGoogle Scholar
Lee, C. M. C., and Ready, M. J.. “Inferring Trade Direction from Intraday Data.” Journal of Finance, 46 (1991), 733–746.CrossRefGoogle Scholar
Smith, J. W. “The Role of Quotes in Attracting Orders on the Nasdaq Interdealer Market.” Working Paper, NASD Economic Research (1999).Google Scholar
Stoll, H. R. “Friction.” Journal of Finance, 55 (2000), 1479–1514.CrossRefGoogle Scholar
Weston, J. P. “Competition on the Nasdaq and the Impact of Recent Market Reforms.” Journal of Finance, 55 (2000), 2565–2598.CrossRefGoogle Scholar