Electronic markets win out over traditional dealing

May 19, 2003

Trading through dealers on the London Stock Exchange could be obsolete in less than three years, according to new research funded by the Economic and Social Research Council.

A study led by Dr Nir Vulkan of the Saïd Business School and Worcester College, University of Oxford, investigated where traders would trade if they have the choice of either a dealers' market or a computerised system. "Our study suggests that in a just a few years' time the traditional dealing market on the London Stock Exchange will become obsolete unless steps are taken to make it more attractive," states Dr Vulkan.

This finding results from a study designed to understand why buyers and sellers participate in electronic markets for trading goods and services, and the consequences of these decisions for the efficiency of electronic markets. "Our research was motivated by advances in information technology (e.g. Electronic Data Interchanges, B2B exchanges and Electronic Communication Networks) which mean buyers and sellers now have a real choice of where to trade for raw materials, office supplies and related services and for buying and selling stocks, bonds and future contracts, " he explains.

Researchers looked at data collected from the London Stock Exchange (LSE). In October 1997, the LSE introduced an automated Stock Exchange Electronic Trading Service (SETS), to complement the existing quote-driven dealership market, (Stock Exchange Automated Quotation system or SEAQ) where trade is based around direct negotiation between the trader and market maker. SETS is an order-driven trading mechanism, established to lower trading costs and increase trade volumes.

Exploration of this data from the LSE confirms the research team's earlier theoretical hypothesis: that 'weak' traders (e.g. sellers selling only a small number of shares) are attracted to the anonymous electronic marketplace, and furthermore, once 'weak' traders have moved to the electronic market, then the remaining 'weakest' traders (who where not particularly 'weak' before) will now be disadvantaged from trading in the dealer's market and will switch to trading in the electronic marketplace. The theory concludes that in the absence of additional incentives this process will continue until, finally, all traders have moved to the electronic market.

Ultimately, he believes, this unravelling process will lead to the growth of the automated SETS mechanism at the expense of traditional dealer markets. Moreover, this finding is likely to hold true not only for other financial markets (including bonds) but commodity markets such as steel. "This process is already at work in the bond market where the computerised market for trading bonds is growing rapidly," he suggests. Moreover, on the consumer side, a recent study of transaction prices for new cars purchased online and offline concludes that the Internet is disproportionately beneficial to those who have personal characteristics that put them at a disadvantage in negotiations i.e. those who correspond to the 'weak' traders type.

"The one barrier to the unravelling process predicted by the theory is any step that would make the dealer market more attractive," suggests Dr Vulkan. "For example, low commissions offered in the dealers market will increase the attractiveness of this form of trading. And evidence suggests that the flexibility of these commissions will ensure that large trade continues to take place in SEAQ because large traders are able to negotiate soft commissions," he concludes.
-end-
For further information:

Contact Dr Nir Vulkan, The Saïd Business School, Park End Street, Oxford OX1 1HP, e-mail: nir.vulkan@sbs.ox.ac.uk TEL: 01865 288800

Or Lesley Lilley or Anna Hinds at ESRC, on 44-179-341-3119/413122

NOTES FOR EDITORS

1. The research report 'Understanding Electronic Markets' was funded by the Economic and Social Research Council (ESRC). Dr Nir Vulkan is a University Lecturer in the Saïd Business School, and a Fellow of Worcester College, University of Oxford.
2. The ESRC is the UK's largest funding agency for research and postgraduate training relating to social and economic issues. It provides independent, high-quality, relevant research to business, the public sector and Government. The ESRC invests more than £76 million every year in social science and at any time is supporting some 2,000 researchers in academic institutions and research policy institutes. It also funds postgraduate training within the social sciences to nurture the researchers of tomorrow. More at http://www.esrc.ac.uk
3. REGARD is the ESRC's database of research. It provides a key source of information on ESRC social science research awards and all associated publications and products. The website can be found at http://www.regard.ac.uk.

Economic & Social Research Council

Related Data Articles from Brightsurf:

Keep the data coming
A continuous data supply ensures data-intensive simulations can run at maximum speed.

Astronomers are bulging with data
For the first time, over 250 million stars in our galaxy's bulge have been surveyed in near-ultraviolet, optical, and near-infrared light, opening the door for astronomers to reexamine key questions about the Milky Way's formation and history.

Novel method for measuring spatial dependencies turns less data into more data
Researcher makes 'little data' act big through, the application of mathematical techniques normally used for time-series, to spatial processes.

Ups and downs in COVID-19 data may be caused by data reporting practices
As data accumulates on COVID-19 cases and deaths, researchers have observed patterns of peaks and valleys that repeat on a near-weekly basis.

Data centers use less energy than you think
Using the most detailed model to date of global data center energy use, researchers found that massive efficiency gains by data centers have kept energy use roughly flat over the past decade.

Storing data in music
Researchers at ETH Zurich have developed a technique for embedding data in music and transmitting it to a smartphone.

Life data economics: calling for new models to assess the value of human data
After the collapse of the blockchain bubble a number of research organisations are developing platforms to enable individual ownership of life data and establish the data valuation and pricing models.

Geoscience data group urges all scientific disciplines to make data open and accessible
Institutions, science funders, data repositories, publishers, researchers and scientific societies from all scientific disciplines must work together to ensure all scientific data are easy to find, access and use, according to a new commentary in Nature by members of the Enabling FAIR Data Steering Committee.

Democratizing data science
MIT researchers are hoping to advance the democratization of data science with a new tool for nonstatisticians that automatically generates models for analyzing raw data.

Getting the most out of atmospheric data analysis
An international team including researchers from Kanazawa University used a new approach to analyze an atmospheric data set spanning 18 years for the investigation of new-particle formation.

Read More: Data News and Data Current Events
Brightsurf.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.