Do brokers' recommendation changes generate brokerage? Evidence from a central limit order market
HWH Chan, RW Faff, YK Ho, R Brown
Accounting and Finance | Wiley | Published : 2019
We examine the short‐term response to recommendation changes on the Australian Securities Exchange, a central limit order market. In both central limit order markets and dealer‐driven markets, clients may reward the recommending broker with increased trade volumes. But a central limit order market does not have mandatory market makers and hence provides greater opportunity to free ride. We find evidence supporting the hypothesis that recommending brokers are rewarded with higher trade volumes and brokerage commission. Consistent with the tipping hypothesis, these rewards are concentrated in the period shortly before the release. There is no evidence of free riding.
We thank the Australian Centre for Financial Studies for their generous financial support. We are grateful to East Coles, IRESS and SIRCA for assistance with data. The first, second and third authors are grateful to, respectively, the University of Manchester, Monash University and the University of Amsterdam for support during sabbatical leaves. We are grateful to William Tang for expert computing assistance and to Jennifer Juergens for helpful discussions. We also thank staff at Acorn Capital for feedback.