Trading activity and price impact in parallel markets: SETS vs. off-book market at the London Stock Exchange

TL;DR

This study compares trading activity and price impact between on-book electronic trading and off-book dealership trading at the London Stock Exchange, revealing distinct volume distributions, trading profiles, and impact dynamics.

Contribution

It provides an empirical analysis of the differences in trading behavior and price impact between on-book and off-book markets, highlighting new insights into market participant roles and impact patterns.

Findings

Off-book transaction volumes have fatter tails than on-book volumes.

Market participants can be categorized by trading profiles.

Strong anticorrelation exists between on-book and off-book inventory variations.

Abstract

We empirically study the trading activity in the electronic on-book segment and in the dealership off-book segment of the London Stock Exchange, investigating separately the trading of active market members and of other market participants which are non-members. We find that (i) the volume distribution of off-book transactions has a significantly fatter tail than the one of on-book transactions, (ii) groups of members and non-members can be classified in categories according to their trading profile (iii) there is a strong anticorrelation between the daily inventory variation of a market member due to the on-book market transactions and inventory variation due to the off-book market transactions with non-members, and (iv) the autocorrelation of the sign of the orders of non-members in the off-book market is slowly decaying. We also analyze the on-book price impact function over time, both for positive and negative lags, of the electronic trades and of the off-book trades. The unconditional impact curves are very different for the electronic trades and the off-book trades. Moreover there is a small dependence of impact on the volume for the on-book electronic trades, while the shape and magnitude of impact function of off-book transactions strongly depend on volume.