How Brokers Facilitate Trade for Long-Term Clients in Competitive Securities Markets

In adverse-selection models of security market microstructure, a market maker could enhance efficiency if he or she were willing to sustain short-term trading losses. We show that this desirable activity can be supported as a self-enforcing agreement between broker-dealers and long-lived clients. An...

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Published in:The Journal of business (Chicago, Ill.) Ill.), 1995-01, Vol.68 (1), p.1-33
Main Authors: Aitken, Michael J., Garvey, Gerald T., Swan, Peter L.
Format: Article
Language:English
Subjects:
Australia
Brokerages
Business orders
Business strategies
Coefficients
Competitiveness
Fees
Linear regression
Liquidity
Market prices
Price premiums
Securities issues
Securities markets
Stock brokers
Stock exchange
Stocks
Trade
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container_title The Journal of business (Chicago, Ill.)
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creator Aitken, Michael J.
Garvey, Gerald T.
Swan, Peter L.
description In adverse-selection models of security market microstructure, a market maker could enhance efficiency if he or she were willing to sustain short-term trading losses. We show that this desirable activity can be supported as a self-enforcing agreement between broker-dealers and long-lived clients. An implication is that brokers who sustain such losses should charge higher fees to long-term clients for trades where the broker merely receives a commission. This prediction is supported by an analysis of brokerage rates on the Australian Stock Exchange. By contrast, market makers who make trading profits charge lower agency fees to large, long-term clients.
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source International Bibliography of the Social Sciences (IBSS); Access via Business Source (EBSCOhost)
subjects Australia
Brokerages
Business orders
Business strategies
Coefficients
Competitiveness
Fees
Linear regression
Liquidity
Market prices
Price premiums
Securities issues
Securities markets
Stock brokers
Stock exchange
Stocks
Trade
title How Brokers Facilitate Trade for Long-Term Clients in Competitive Securities Markets
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