This website uses cookies to ensure you have the best experience. Learn more

On The Price Improvements Related To Large Orders In Financial Market Microstructure

3522 words - 15 pages

Introduction:

Students who paid attention in their introductory economics course would recognize that in a typical goods market, large orders receive significant discounts. For instance, retailers often receive significant volume discounts by leveraging considerable buying power when negotiating with suppliers. This result is widely thought not to apply in securities markets. There is an extensive literature that appears to confirm larger orders receive worse prices in open limit order markets like the TSX. Furthermore, stylized models of trading suggest that larger orders receive worse prices in the presence of, among other things, asymmetric information. However, in the case of dealer markets, a 2005 paper published by Bernhardt, Dvoracek, Hughson, and Werner seems to suggest exactly the opposite- larger orders receive significant price improvements over smaller orders on the London Stock Exchange. In that paper, the authors argue that this is a result of the structure of dealer markets. If this is the case, this result should hold on the NASDAQ prior to 1997, when it adopted a limit order book. Therefore, our work is in the spirit of Bernhardt, Dvoracek, Hughson, and Werner with the interest of confirming that their result is in fact due to characteristics of dealer markets.
In this paper, we present a standard theoretical model of dealer markets that generates the testable prediction that larger orders should receive worse prices. Using a sample of intraday data taken from the NASDAQ in 1995 for 21 securities we estimate the relationship between order size and price improvement. Consistent with the finding on the London Stock Exchange (and contrary to the theoretical model), we find that larger orders do in fact receive a statistically and economically significant price improvement over smaller orders.

Literature Review:

There are a number of empirical findings that suggest large trades in markets with electronic limit order books receive worse prices. Furthermore, stylized models of trading (like the one we present) suggest that larger orders should receive worse prices as a result of asymmetric information. That is, informed individuals are expected to prefer to trade larger quantities due to superior information.
Bernhardt, Dvoracek, Hughson, and Werner (2005) examine trade data from the London Stock Exchange in 1991 and find that, contrary to theoretical predictions, larger orders receive price improvements over small orders. They posit that this is due to repeated interactions between brokers and dealers, and illustrate this possibility via a theoretical framework and reinforce the result with an empirical study. The key insight is that large order price improvement can occur due to the structure of pure dealer markets.
Unlike a limit order book where the “best quoted price prevails” and “price competition is simultaneous”, dealer markets have the feature of requiring some negotiation over price. Once negotiation begins, “there...

Find Another Essay On On the Price Improvements Related to Large Orders in Financial Market Microstructure

How the price mechanism determines the equilibrium price in the market and why governments may intervene

1718 words - 7 pages Matthew McDowellAssuming there is pure competition in the market place, and no government intervention, we are able to focus on how the price mechanism determines the equilibrium price in the market. Markets can be effective at resolving the basic issues of what and how much to produce at a certain price level although left to operate on its own, the market can still create unsatisfactory outcomes. When markets do not produce the desired outcome

Influenza Continues to Affect The Population in Large Numbers

1821 words - 8 pages unemployed, poor, with a yearly income of $30,000 or less, or without qualifications in regards to education were appreciably more prone to embrace behaviors resulting in avoidance.7 Preventing influenza transmission and the development of ILI appears clear cut with the proven preventive techniques. However, there are numerous aspects associated with health related behaviors and perceptions that should be considered as well. Researchers proposed a

Sony’s Improvements in the TV Industry

1714 words - 7 pages might be a way to phase out a particular product for new ones to come in (Jude Okogwu, Personal Communications, March 6, 2010).” In addition, if Sony advertised their products as the same quality but with a cheaper price tag, more people would be willing to purchase one of their televisions, as well as remain loyal to the Sony brand. 6. Would say you bought your TV based on the brand quality rather than the price? We asked this question to see

The Effects of Dietary Intake on the Production of Neurotransmitters Related to the Onset of Depression in Humans

2274 words - 9 pages Effects of Dietary PAGE 6 Running head: EFFECTS OF DIET ON DEPRESSION ONSETThe Effects of Dietary Intake on the Production of Neurotransmitters Related to the Onset of Depression in HumansDavid Samuel FloresGranite State CollegeAbstractTo explore the effects of dietary intake on the production of neurotransmitters related to the onset of depression in humans, I have researched various scientific texts and websites detailing scientific studies

Privacy in computers - the effects that unstable security systems can have on large businesses and the threats they deal to databases

650 words - 3 pages acquired by the unauthorised user.It is not only wrong, but intrudes on the privacy of others.As the year 2004 approaches, more companies are looking to modern day technology to run their business. Many users store their data and records on their own system for future reference. If security methods are not attended to, more and more incidents of stolen personal information is going to be reported. This emphasises the importance of security in maintaining the individual's privacy.Josh McConville

Morals And Orders in "Guests of the Nation"

859 words - 3 pages determine what is right and wrong. Most people believe that the laws of society are right and it is our duty to follow them. The majority of people stop at a stop sign even when there is no one else at an intersection. Sometimes what is legally right and what is morally right do not coincide with each other. The characters in "Guests of the Nation" are forced to decide whether to follow orders or their stick to their own personal beliefs.It is

Importance of EMH in the valuation and investment Internet-related stock market

2980 words - 12 pages 1.0Introduction1.1PurposeThe purpose of this report is to investigate the Internet-related stock market, and the importance of EMH in its valuation and investment.1.2ScopeVarious textbooks on finance and certain web-sites were used to gather information and discuss the issues.1.3LimitationsThe limited word count of this report is a big limitation as a number of other important issues could not be covered and the current issues stated could be in

Explain why supply and demand curves shift and how shifts cause changes in the market price

1900 words - 8 pages supply and demand curve for a certain good or service. This occurs when there is perfect competition in a perfectly competitive market. This is where the market is large enough so that no one individual firm or individual has any appreciable influence on the price of the commodity. In monopolistic or oligopolistic competition this may not be the case, and the price of the good may be determined largely through the actions of one or several

How an Alice in Wonderland be related to the mind?

1213 words - 5 pages The classic stories “Alice’s Adventures in Wonderland” and “Through the looking Glass” by Lewis Carroll consist of dreamlike adventures in a crazy world of nonsense. However this nonsense can be deciphered into a complex new system of thinking. This way of thinking can be transferred and directly applied to the mind. How the mind works, its many varying functions, and lastly the unconscious mind can all be tied to Alice. The unconscious mind

INDUSTRIAL REVOLUTION Improvements in farm productivity were expected to cause

820 words - 3 pages in England. It was the industrial revolution that was going on at the time (18th Century) in Britain, which led to greater improvements in the economy of western Europe than farm productivity improvement could have ever caused. It's too simple to ask how developments in farming would have influenced Western Europe. Agriculture is a big issue, but I can also show that the Industrial Revolution -aside from its direct influence on agriculture- had a

End-Winding Analysis in order to minimize the Circulating Current in a Large Synchronous Generator

1174 words - 5 pages the effect of each case on the strands circulating current is compared with the others. II. ARMATURE WINDING CONFIGURATION In high power generator, Circulating current in the armature strands without transposition is very high so that causes high power losses and high armature bars heat. Therefore, the strands of stator’s winding are transposed in large generator in order to minimize ohmic losses and increase efficiency of the generator. Since

Similar Essays

In This Written Project I Try To Focus On To The Relationship Of Drug Related Crime Increase In T.R.N.C. And How Illegal Drugs Market In This Little Island Got Effected By The Global Financial Crisis...

5043 words - 20 pages Chapter 1Introduction and OverviewIn this written Project I'll try to focus on to the relationship of drug related crime increase in T.R.N.C. and how illegal drugs market in this little island got effected by the Global Financial Crisis between 2007-2010 .At this attempt to relate drug-crime increase with economic reseccion , I'll talk about "what is economy ?","what is psychoeconomy and its focusing area?"as well as general information about

Issues Related To Rising Price Essay

532 words - 2 pages the equitable distribution of wealth.Both long-term and short-term measures are to be adopted to check rising prices. These measures include an appeal mixed with threat to the sellers, raids on hoards, the seizing of black money, the cut of Rs.400 crores in central expenditure, the increase in bank rates to 5%, the opening of fair-price shops, the rationing of provisions, the import of food grains.www.newspeechtopics.comESSAY WRITING - SPEECH TOPICS - ESSAY TOPICS - DEBATE TOPICS - PARAGRAPH WRITING - DISCUSSION TOPICS

The Opening To A Short Story Set In A Large City. Concentrating On Setting And Character

1074 words - 4 pages other side of the room, in front of the window there was a long white table with plastic cups and plates laid out on it for the party.'Coffeeee!' Jeffery shouted as he handed me my coffee and sat on the other armchair. 'How do you like my new designer chairs? Comfy huh?''Yeah they're nice. I replied, sipping my coffee.'I need to get dressed for the party', he said. 'What do you think I should wear? Turquoise or yellow?' He held up two shirts. 'I

Improvements To The Selection Process Essay

1185 words - 5 pages implies testing may result in adverse impact but it is defended by job relatedness of the selection test. A consulting firm worked with the fire department to develop testing and interview tools yet blacks scored less than hispanics or whites. To ensure tests are job related my organization should work directly with employees, solicit their input and feedback during the development stage and provide materials for test preparation. I selected