Preferencing, internalization, best execution, and dealer profits

Published

Journal Article

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.

Full Text

Duke Authors

Cited Authors

  • Hansch, O; Naik, NY; Viswanathan, S

Published Date

  • October 1, 1999

Published In

Volume / Issue

  • 54 / 5

Start / End Page

  • 1799 - 1828

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/0022-1082.00167

Citation Source

  • Scopus