9th Symposium on Finance, Banking, and Insurance
Universität Karlsruhe (TH), Germany, December 11 - 13, 2002

Abstract

Information­Based Trading in Dealer and Auction Markets:
An Analysis of Exchange Listings

Hans G. Heidle and Roger D. Huang

Owen Graduate School of Management
Vanderbilt University
Nashville, TN 37203

Auction markets are often touted as better trading mechanisms for unmasking informed traders than dealer markets. Our analysis of firms that transfer to an alternative exchange structure suggests that traders are more anonymous in a competing dealer market than in an auction environment. Our evidence also shows that when firms move to a new market structure, the changes in the risk of trading with an informed trader are associated with the changes in the bid­ask spread. Moreover, the changes in the probability of transacting with an informed trader are more pronounced for firms that are less liquid prior to the relocation. Our results provide evidence of differences in bid­ask spreads between dealer and auction markets that are induced by differences in market structure.