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Preferencing, Internalization, Best Execution, and Dealer Profits

Oliver Hansch, Narayan Y. Naik and S. Viswanathan
The Journal of Finance
Vol. 54, No. 5 (Oct., 1999), pp. 1799-1828
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/222504
Page Count: 30
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Preferencing, Internalization, Best Execution, and Dealer Profits
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Abstract

The practices of preferencing and internalization have been alleged to support collusion, cause worse execution, and lead to wider spreads in dealership style markets relative to auction style markets. For a sample of London Stock Exchange stocks, we find that preferenced trades pay higher spreads, however they do not generate higher dealer profits. Internalized trades pay lower, not higher, spreads. We do not find a relation between the extent of preferencing or internalization and spreads across stocks. These results do not lend support to the "collusion" hypothesis but are consistent with a "costly search and trading relationships" hypothesis.

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