Market quality of dealer versus hybrid markets for illiquid securities: new evidence from the FTSE AIM Index

This paper explores liquidity effects following the introduction of electronic limit-order trading for 48 illiquid stocks listed on the FTSE AIM Index. We find evidence of a sustained increase in the liquidity of the stocks as a result of limit-order trading. Furthermore, the enhancement in the liquidity of the stocks is due to a decrease in the direct cost of trading as opposed to a reduction in the asymmetric information cost of transacting. The empirical findings suggest that a hybrid market with a limit-order book and voluntary dealers outperforms a dealership market with obligatory market makers for illiquid stocks.