Abstract
Relationships between trading cost, technology, and the nature of intermediation in the trading services industry are discussed. Electronic markets are linked to reductions in trading costs. Lower explicit costs are related to system development and operating costs. Electronic order book information is identified as a means of realizing implicit cost savings. The concept of liquidity management in electronic environments is introduced, and its potential is empirically illustrated. The empirical results suggest new roles for brokerage and exchange operations, and competition between the two. Competitive advantage with respect to the provision of liquidity management services is compared across types of intermediaries.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Amihud, Yakov, and Haim Mendelson. “The Liquidity Route to a Lower Cost of Capital.” Journal of Applied Corporate Finance 12 (2000), 8–25.
Barclay, Michael J., William G. Christie, Joseph H. Harris, E. Kandel, and Paul H. Schultz. “The Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks.” Journal of Finance 54 (1999), 1–34.
Bessembinder, Hendrik, and Herbert M. Kaufman. “A Cross-Exchange Comparison of Execution Costs and Information Flow for NYSE-Listed Stocks.” Working Paper, Arizona State University (1997).
Biais, Bruno, Pierre Hillion, and Chester Spatt. “An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse.” Journal of Finance 50 (1995), 1655–1689.
Coppejans, Mark, Ian Domowitz, and Ananth Madhavan. “Liquidity in an Automated Auction.” Working Paper, Pennsylvania State University (2000).
Domowitz, Ian. “A Taxonomy of Automated Trade Execution Systems.” Journal of International Money and Finance 12 (1992), 607–631.
Domowitz, Ian. “An Exchange is a Many Splendored Thing: The Classification and Regulation of Automated Trading Systems.” In: Andrew Lo, ed., The Industrial Organization and Regulation of Securities Markets, Chicago, IL: University of Chicago Press, 1996.
Domowitz, Ian, Jack Glen, and Ananth Madhavan. “International Cross-listing and Order Flow Migration: Evidence From an Emerging Market.” Journal of Finance 53, (1998), 2001–2027.
Domowitz, Ian, Jack Glen, and Ananth Madhavan. “Liquidity, Volatility, and Equity Trading Costs Across Countries.” International Finance 4 (2001), 221–256.
Domowitz, Ian, and Benn Steil. “Automation, Trading Costs, and the Structure of the Securities Trading Industry.” Brookings-Wharton Papers on Financial Services 2 (1999), 33–92.
Domowitz, Ian, and Benn Steil. “Innovation in Equity Trading Systems: The Impact on Transactions Costs and Cost of Capital.” In: Richard Nelson, David Victor, and Benn Steil, eds, Technological Innovation and Economic Performance, chapter 12, Princeton, NJ: Princeton University Press, 2001.
Foerster, S. R., and G. A. Karolyi. “The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States.” Journal of Finance 54 (1999), 981–1013.
Handa, Puneet, Robert Schwartz, and Ashish Tiwari. “Quote Setting and Price Formation in an Order Driven Market.” Working Paper, University of Iowa, (1999).
Harris, Lawrence. “Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes.” Review of Financial Studies 1 (1994), 148–178.
Irvine, Paul, George Benston, and Eugene Kandel. “Liquidity Beyond the Inside Spread: Measuring and Using Information in the Limit Order Book.” Working paper (2000).
Macey, Jonathan R., and Maureen O'Hara. “Globalization, Exchange Governance, and the Future of Exchanges.” Brookings-Wharton Papers on Financial Services 2 (1999), 1–32.
Nalebuff, Barry. “Competing Against Bundles.” In: Gareth D. Myles and Peter Hammond, eds, Incentives, Organization, and Public Economics: Papers in Honor of Sir James Mirrlees, Oxford, UK: Oxford University Press, 2000.
Pagano, Marco, and Ailsa Röell. “Trading Systems in European Stock Exchanges: Current Performance and Policy Options.” Economic Policy 10 (1990), 65–115.
Pirrong, S. Craig. “Market Liquidity and Depth on Computerized and Open Outcry Trading Systems: A Comparison of DTB and LIFFE Bund Contracts.” Journal of Futures Markets 16 (1996), 519–543.
Schack, John. “Cost Containment.” Institutional Investor 33 (1999), 43–49.
Willoughby, John “Executions Song.” Institutional Investor 32 (1998), 51–56.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Domowitz, I. Liquidity, Transaction Costs, and Reintermediation in Electronic Markets. Journal of Financial Services Research 22, 141–157 (2002). https://doi.org/10.1023/A:1016077023185
Issue Date:
DOI: https://doi.org/10.1023/A:1016077023185