The Market Quality of Moderately Liquid Securities in a Hybrid Market: The Evidence

Electronic limit-order trading systems have been sweeping securities exchanges around the world since the last decade. This paper studies a case of transition, namely, a group of moderately liquid stocks that started trading on SETS of the London Stock Exchange. The evidence reveals that the liquidity of those stocks substantially dropped after the introduction of the limit order book despite the presence of a dealer network. The transition provides an intriguing example that a hybrid market where a limit order book and dealers co-exist may not perform as well as a dealership market.