The Journal of Finance because they provide immediacy more cheaply than investors could provide it for themselves (by placing limit orders with brokers and borrowing or lending until the limit order is executed, for example). Not everyone is a dealer because there are fixed costs (office, phone, etc) to the dealer business. Section I presents an intuitive approach to holding costs. Section II of the paper discusses the principal assumptions underlying the analysis. Section III develops the holding cost function in a one period context. Implications of the model for determinants of bid-ask spreads and for the role of diversification by dealers are discussed in Section IV. Order costs and information costs are discussed in Section V. In Section VI certain policy issues related to the industrial organization of dealers are discussed in the context of the model. In Section VII modifications are made to put the model in a multiperiod context. The conclusions are summarized in Section VIII. I. A FAMILIAR PICTURE The dealer can be viewed as any investor who has a desired portfolio (his investment account) based on the opportunities he sees and on his preferences. Supplying immediacy to other investors means moving away from
The Journal of Finance – Wiley
Published: Sep 1, 1978
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