Is the London market competitive?: a study of trading behavior of London market makers

Abstract

This study examines trading activities of market makers for 25 FTSE-100 component stocks to assess the competitiveness of the London Stock Exchange (LSE). The results show that market makers can obtain relatively large shares of public order flows through posting competitive prices with significant quote depths. Market share leaders do not rely on preference trading in securing public order flow on the London market because preference trading is limited to small-sized trades. Trading profitability of LSE market makers is not driven by their market share; rather they are rewarded with higher spread margins for assuming trading risks. The overall findings from the study indicate that the LSE is a competitive dealership market.