The Impact of Trading Mechanisms on Liquidity, Order Processing Costs, and the Degree of Information Asymmetry

Abstract

What are the pros and cons of dealer versus specialist markets? By focusing on order processing costs, liquidity, and the scale of information asymmetry, this paper provides empirical evidence. We apply a newly developed empirical model that decomposes the bid-ask spread. This enables to measure the two sources of information asymmetry, namely liquidity and trading volume, separately. This paper confirms that order-processing costs are significantly higher on dealer markets than on specialist markets. Moreover, liquidity does not depend on trading mechanisms - but information asymmetry as a whole is systematically higher on dealer markets.