Dealer Liquidity in an Auction Market: Evidence from the London Stock Exchange

We analyse the trade characteristics and market conditions which determine the market share of a continuous auction trading system at the London Stock Exchange, where a network of broker-dealer firms is also available for trade. We show that execution and information risks govern the choice of execution venue. Further, we uncover strong commonality in the market share of the order book across stocks, and find that variables proxying for market-wide liquidity and informational risks also affect the choice of trading venue. Our results suggest that competing, off-book liquidity suppliers voluntarily perform at least some of the 'stabilisation' functions normally assigned to designated market-makers.