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Preferencing, internalization and the best execution: evidence from the London Stock Exchange

Subject

Finance

Publishing details

IFA Working Paper

Authors / Editors

Hansch O;Naik N Y;Viswanathan S

Biographies

Narayan Naik

Publication Year

1997

Abstract

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.

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 254

Series

IFA Working Paper

Available on ECCH

No


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