TY  - JOUR
AU  - Reiss,Peter C.
AU  - Werner,Ingrid M.
TI  - Transaction Costs in Dealer Markets: Evidence From The London Stock Exchange
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4727
PY  - 1994
Y2  - May 1994
UR  - http://www.nber.org/papers/w4727
L1  - http://www.nber.org/papers/w4727.pdf
N1  - Author contact info:
Peter C. Reiss
Graduate School of Business
Stanford University
Stanford, CA 94305-5015
Tel: 650/725-2759
Fax: 650/725-7979
E-Mail: preiss@leland.stanford.edu
M1  - published as Peter C. Reiss, Ingrid M. Werner. "Transaction Costs in Dealer Markets: Evidence from the London Stock Exchange," in Andrew W. Lo, editor, "The Industrial Organization and Regulation of the Securities Industry" University of Chicago Press (1996)

AB  - This paper describes regularities in the intraday spreads and prices quoted by dealers on the London Stock Exchange.  It develops a measure of spread-related transaction costs, one that recognizes dealers' willingness to price trades within their quoted spreads. This measure of transaction costs shows that trading costs are systematically related to a trade's size, characteristics of the trading counterparties, and security characteristics.  Customers pay the full spread on small trades while medium to large trades receive more favorable execution.  Market makers only discount very large customer trades while dealers regularly discount medium to large trades.  Inter-dealer trades generally receive favorable execution, and discounts increase in size.  Market makers do not discount trades with each other over the phone, but do discount when trading anonymously using inter-dealer-brokers.  Quoted and touch spreads are falling in the number of market makers.  The rate of decline is interpreted as reflecting economies of scale in market making.
ER  -