Working paper No. 95
By Victoria Saporta, Giorgio Trebeschi and Anne Vila
This paper contributes to the empirical market microstructure literature on the London Stock Exchange (LSE) by producing model-based estimates of the spread and its components. The paper applies the same approach to test for changes in the determinants of price formation following the January 1996 change in the market’s publication rules. Our results suggest that order-processing costs are a far more important determinant of the LSE spread than the literature has so far presumed. Consistent with existing research findings, we find no discernible effect of post-trade transparency on market liquidity.