Hostname: page-component-745bb68f8f-b95js Total loading time: 0 Render date: 2025-01-07T16:22:59.116Z Has data issue: false hasContentIssue false
  • English
  • Français

Market Liquidity and Trader Welfare in Multiple Dealer Markets: Evidence from Dual Trading Restrictions

Published online by Cambridge University Press:  06 April 2009

Peter R. Locke ,
Asani Sarkar  and
Lifan Wu
Peter R. Locke
Affiliation:
Commodity Futures Trading Commission, 2033 K Street, N.W., Three Lafayette Center, Washington DC, 20581
Asani Sarkar
Affiliation:
Federal Reserve Bank of New York, Research Department, 33 Liberty St., New York, NY 10045
Lifan Wu
Affiliation:
California State University, Los Angeles, Department of Finance and Law, 5151 State University Dr., Los Angeles, CA 90032.
Get access Rights & Permissions [Opens in a new window]

Abstract

In the context of dual trading restrictions, we examine whether aggregate liquidity measures are appropriate indicators of trader welfare in multiple dealer markets. Consistent with our theoretical results, we show empirically that dual trading restrictions did not affect market liquidity significantly, but dual traders of above average skills may have quit brokerage and switched to trading exclusively for their own accounts following restrictions. Further, customers of these dual traders had lower trading costs in the period before restrictions relative to the trading costs of all customers after restrictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 1 , March 1999 , pp. 57 - 88
Copyright
Copyright © School of Business Administration, University of Washington 1999

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

Abramowitz, M., and Stegun, C. A. (eds.). Handbook of Mathematical Functions with Formulas, Graphs, and Mathematical Tables. New York, NY: Dover (1974).Google Scholar
Ahn, H.; Cao, C. Q.; and Choe, H.. “Decimalization and Competition among Exchanges: Evidence from the Toronto Stock Exchange Cross-Listed Securities.” Journal of Financial Markets, 1 (1998), 51–87.Google Scholar
Ahn, H.; Cao, C. Q.; and Choe, H.. “Tick Size, Spread and Volume.” Journal of Financial Intermediation, 5 (1996), 2–22.CrossRefGoogle Scholar
Bacidore, J. “The Impact of Decimalization on Market Quality: An Empirical Investigation of the Toronto Stock Exchange.” Journal of Financial Intermediation, 6 (1997), 92–120.CrossRefGoogle Scholar
Board, J.; Vila, A. F.; and Sutcliffe, C.. “Market Maker Heterogeneity. Evidence from the London Stock Exchange.” Working Paper, the Bank of England (1997).Google Scholar
Cao, C.; Choe, H.; and Hatheway, F.. “Does the Specialist Matter? Differential Execution Costs and Intersecurity Subsidization on the NYSE.” Journal of Finance, 52 (1997), 1615–1640.Google Scholar
Chakravarty, S. “Should Actively Traded Futures Contracts Come under the Dual Trading Ban?” Journal of Futures Markets, 14 (1994), 661–684.Google Scholar
Chang, E. C., and Locke, P. R.. “The Performance and Market Impact of Dual Trading: CME Rule 552.” Journal of Financial Intermediation, 5 (1996), 23–48.CrossRefGoogle Scholar
Chang, E. C.; Locke, P. R.; and Mann, S. C.. “The Effect of CME Rule 552 on Dual Traders.” Journal of Futures Markets, 14 (1994), 493–510.Google 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
Cohen, K. J.; Maier, S. F.; Schwartz, R. A.; and Whitcomb, D. K.. The Microstructure of Securities Markets. Englewood Cliffs, NJ: Prentice Hall (1986).Google Scholar
Commodity Futures Trading Commission. Economic Analysis of Dual Trading on Commodity Exchanges. Division of Economic Analysis, Washington, DC (1989).Google Scholar
Corwin, S. A. “Differences in Trading Behavior across New York Stock Exchange Specialist Firms.” Journal of Finance, forthcoming.Google Scholar
Demsetz, H. “The Cost of Transacting.” Quarterly Journal of Economics, 82 (1968), 33–53.Google Scholar
Fishman, M. J., and Longstaff, F. A.. “Dual Trading in Futures Markets.” Journal of Finance, 47 (1992), 643–671.Google Scholar
Grossman, S. J. “An Economic Analysis of Dual Trading.” Rodney L. White Center for Financial Research Paper 33–89, The Wharton School, Univ. of Pennsylvania (1989).Google Scholar
Grossman, S. J., and Miller, M. H.. “Liquidity and Market Structure.” Journal of Finance, 43 (1988), 617–637.CrossRefGoogle Scholar
Hasbrouck, J. “Assessing the Quality of a Securities Market: A New Approach to Transaction-Cost Measurement.” Review of Financial Studies, 6 (1993), 191–212.Google Scholar
Kleidon, A. W., and Willig, R. D.. “Why Do Christie and Schultz Infer Collusion from Their Data?” Working Paper, Cornerstone Research, Menlo Park, CA (1995).Google Scholar
Kuserk, G., and Locke, P.. “Scalper Behavior on Futures Markets.” Journal of Futures Markets, 13 (1993), 409–431.CrossRefGoogle Scholar
Kyle, A. S. “Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 1315–1335.Google Scholar
Lee, C. M. C. “Market Integration and Price Execution for NYSE-listed Securities.” Journal of Finance, 48 (1993), 1009–1038.Google Scholar
Leuthold, R. M.; Garcia, P.; and Lu, R.. “The Returns and Forecasting Ability of Large Traders in the Frozen Pork Bellies Futures Market.” Journal of Business, 67 (1994), 459–473.Google Scholar
Locke, P., and Sarkar, A.. “Volatility and Liquidity in Futures Markets.” Research Paper #9612, Federal Reserve Bank of New York (1996).Google Scholar
Park, H.; Sarkar, A.; and Wu, L.. “Execution Quality and Principal-Agent Conflicts in Dealer Markets: Evidence from Futures Markets.” Working Paper, the Federal Reserve Bank of New York (1998).Google Scholar
Roell, A. “Dual Capacity Trading and the Quality of the Market.” Journal of Financial Intermediation, 1 (1990), 105–124.Google Scholar
Sarkar, A. “Dual Trading: Winners, Losers and Market Impact.” Journal of Financial Intermediation, 4 (1995), 77–93.Google Scholar
Smith, T., and Whaley, R. E.. “Assessing the Cost of Regulation: The Case of Dual Trading.” Journal of Law and Economics, 37 (1994), 329–336.Google Scholar
Spiegel, M., and Subrahmanyam, A.. “Informed Speculation and Hedging in a Noncompetitive Securities Market.” Review of Financial Studies, 5 (1992), 307–329.Google Scholar
Stoll, H. R. “Alternative Views of Market Making.” In Market Making and the Changing Structure of the Securities Industry, Ho, Amihud T., and Schwartz, R., eds. Lexington, MA: Lexington Books (1985).Google Scholar
Walsh, M. J., and Dinehart, S. J.. “Dual Trading and Futures Market Liquidity: An Analysis of Three Chicago Board of Trade Contract Markets.” Journal of Futures Markets, 11 (1991), 519–537.CrossRefGoogle Scholar