Trading frictions and market structure: An empirical analysis

Cai, Charlie X.; Hillier, David; Hudson, Robert; Keasey, Kevin

Abstract

Market structure affects the informational and real frictions faced by traders in equity markets. Using bid-ask spreads, we present evidence which suggests that while real frictions associated with the costs of supplying immediacy are less in order-driven systems, informational frictions resulting from increased adverse selection risk are considerably higher in these markets. Firm value, transaction size and order location are all major determinants of the trading costs borne by investors. Consistent with the stealth trading hypothesis of Barclay and Warner (1993), we report that informational frictions are at their highest for medium size trades that go through the order book. Finally, while there is no doubt that the total costs of trading on order-driven systems are lower for very liquid securities, the inherent informational inefficiencies of the trading format should not be ignored. This is particularly true for the vast majority of small to mid-size stocks that experience infrequent trading and low transaction volume. © 2008 Blackwell Publishing Ltd.

Citation

Cai, C. X., Hillier, D., Hudson, R., & Keasey, K. (2008). Trading frictions and market structure: An empirical analysis. Journal of Business Finance and Accounting, 35(3-4), 563-579. https://doi.org/10.1111/j.1468-5957.2008.02076.x

• Journal Article Type: Article
• Acceptance Date: Sep 7, 2007
• Online Publication Date: Mar 4, 2008
• Publication Date: 2008-04
• Deposit Date: Nov 13, 2014
• Journal: Journal Of Business Finance & Accounting
• Print ISSN: 0306-686X
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 35
• Issue: 3-4
• Pages: 563-579
• DOI: https://doi.org/10.1111/j.1468-5957.2008.02076.x
• Keywords: Business, Management and Accounting (miscellaneous); Accounting; Finance
• Public URL: https://hull-repository.worktribe.com/output/470963
• Publisher URL: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-5957.2008.02076.x
• Contract Date: Nov 13, 2014