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

Finance

IFA Working Paper

Hansch O; Naik N Y; Viswanathan S

Narayan Naik

1997

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.

Institute of Finance and Accounting

FIN 254

IFA Working Paper

No