Is the London Market Competitive? A Study of Trading Behavior of London Market Makers

A Study of Trading Behavior of London Market Makers Abstract This study examines the competitiveness of the London Stock Exchange (LSE) on the basis of trading activities of different market makers for a sample of FTSE-100 component stocks. Specifically, the relations studied between market shares of individual market makers and their price- and quantity-setting behavior, preferenced trading activities, and trading profitability infer the competitiveness of the London market. The results show that market makers can obtain relative larger shares of public order flows through posting more competitive prices with greater quote depths. No evidence is found to support that preferenced trading distort the market shares of trading among market makers because it is limited to small-sized trades. However, this study does suggest that those market makers who takes more trading risks are not only rewarded with larger market shares of public order flows but also compensated with higher spread profit margins. The overall findings from the study indicate that the LSE is a competitive dealership market.