文档介绍：Preferencin g, In t er n aliza t ion, Be st Execu t ion
an d De aler Pro t s
b y
Oliv er Hansc h, Naray an Y. Naik, an an a t h an
A b stract
Th e pract ice s of preferencin g, in t er n aliza t ion, an d b e st execu t ion h a v e b een cr it i-
cize d as ca us in gw ors e execu t ion in d ealership m ar k et s lik e NASD A Q rela t iv et o
a u ct ion st yle m ar k et s lik et h e NYSE. W est udy t h e qualit y of execu t ions an dt h e
pro t a bilit yofm ar k et m akin g for in t er n alize d, preference d an d non-preference d or-
d er
o wont h e Lon don St oc k Exc h an ge for t h e FTSE-100 st oc ks t h e s e are t h e most
liquid st oc ks on t h e exc h an ge . Our d a t a allo wust oid en t ify t h e brok er wh o init ia t es
an dt h em ar k et m ak er wh o execu t e s eac h trad e. Our re sul t sin dica t et h a t ord er
o w
execu t ed b ym ar k et m ak ers not p ost in gt h e b e st quot e s preference d ord er
o w
rece iv es w ors e execu t ion rela t iv et o non-preference d ord er
o w. Ho w ev er, d ealers
m ak elo w er pro t sont h e preference d ord er
o w rela t iv et o non-preference d ord er
o w. Mu c hoft hi s di erence i s d ue t ot h e large ord ers wh ere t h e high er spread
m argin on preference d ord er
o w i s ero d ed b y a large n ega t iv e p os it ion m argin.
Our re sul t s sugge st t h a tt h e ord er
o w rou t ed b y brok er t oad ealer b elon gin gt o
th e sam e rm in t er n alize d ord er
o w rece iv e s s imilar, not w ors e, execu t ion an d
is m argin ally le ss pro t a pare d t ot h erestoft h e ord er
o w. Fin ally , our
n din gs sh o wt h a tt h ed ealers m ak eo v erall pro t st h a t are not st a t ist ica lly di eren t
f rom zero. Th e s e re sul t s are con trary t ot h e pre dict ions of t h e `collus ion' h yp ot h esis
an dt h e `quot e s are f ree o pt ions' h yp ot h esis. Ho w ev er, t h ey are cons i st en t wit ht h e
h yp ot h esis t h a tt h ere are cost sofn