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Market Liquidity and Trader Welfare in Multiple Dealer Markets: Evidence from Dual Trading Restrictions

Published online by Cambridge University Press:  06 April 2009

Peter R. Locke ,
Asani Sarkar  and
Lifan Wu
Peter R. Locke
Affiliation:
Commodity Futures Trading Commission, 2033 K Street, N.W., Three Lafayette Center, Washington DC, 20581
Asani Sarkar
Affiliation:
Federal Reserve Bank of New York, Research Department, 33 Liberty St., New York, NY 10045
Lifan Wu
Affiliation:
California State University, Los Angeles, Department of Finance and Law, 5151 State University Dr., Los Angeles, CA 90032.
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Abstract

In the context of dual trading restrictions, we examine whether aggregate liquidity measures are appropriate indicators of trader welfare in multiple dealer markets. Consistent with our theoretical results, we show empirically that dual trading restrictions did not affect market liquidity significantly, but dual traders of above average skills may have quit brokerage and switched to trading exclusively for their own accounts following restrictions. Further, customers of these dual traders had lower trading costs in the period before restrictions relative to the trading costs of all customers after restrictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 1 , March 1999 , pp. 57 - 88
Copyright
Copyright © School of Business Administration, University of Washington 1999

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