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Automating german equity trading: Bid-ask spreads on competing systems

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Abstract

As a result of automating trading in the most active German stocks, data on bid-ask spreads on three competing system—IBIS, MATIS, and SEAQ International—have become available. The intraday pattern of spreads suggests a mid-session effect and a home-market effect. Contrary to what one might expect, the spreads for identical stocks differ substantially from system to system. Paradoxically, the system with the lowest spreads, MATIS, did not attract most of the volume. Actually, its market share declined. In an attempt to explain the MATIS paradox we hypothesize that bid-ask spreads compensate the market maker for a bundle of several transaction services of which providing immediacy is merely one. This complicates both national and international spread comparisons and has implications for the decomposition of observed bid-ask spreads.

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Authors and Affiliations

  1. Universität Hamburg, Institut für Geld- und Kapitalverkehr, Von-Melle-Park 5, W-2000, Hamburg 13, Germany

    Hartmut Schmidt

  2. Institut für Geld- und Kapitalverkehr, Universität Hamburg, Von-Melle-Park 5, W-2000, Hamburg 13, Germany

    Peter Iversen

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  1. Hartmut Schmidt
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  2. Peter Iversen
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Schmidt, H., Iversen, P. Automating german equity trading: Bid-ask spreads on competing systems. J Finan Serv Res 6, 373–397 (1993). https://doi.org/10.1007/BF01046076

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  • DOI: https://doi.org/10.1007/BF01046076

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