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.

We propose a link between market structure and the resulting market characteristics—tick size, bid-ask spreads, quote clustering, and market depth. We analyze transactions data of stocks traded on the London Stock Exchange, a dealer market. We conclude that market charateristics are endogenous to the market structure. The London dealer market does not have a mandated tick size, and it exhibits higher spreads, higher quote clusterings, and higher market depth than the NYSE auction market. Clustering of trade prices is similar in London and New York.

This paper examines the pricing of exchange-traded long-term corporate bond portfolios. Observable instruments measuring the term structure of interest rates, levels of bond and stock prices, and a January dummy are found to predict excess returns on corporate bonds. An intertemporal asset pricing model with changing expectations and unobservable factors is then estimated for the predictable excess returns using Hansen's Generalized Method of Moments. The results show that a multibeta linear time-vary ing model of conditional expected returns with constant betas can successfully value corporate bonds. Specifically, the tests indicate the presence of two time-varying hedge portfolios. The data, however, support a single latent variable specification when all January observations are excluded. This result suggests the existence of a strong January seasonal in one of the latent variables.