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Search Costs: The Neglected Spread Component

  • Author(s): Flood, Mark D.
  • Huisman, Ronald
  • Koedijk, Kees G.
  • Lyons, Richard K.
  • et al.
Abstract

Dealers need to search for quotes in many of the world's largest markets (such as spot foreign exchange, US government bonds, and the London Stock Exchange). This search affects trading cost. We estimate the share of total trading cost attributable to search. Our experiments show that the share is large -- roughly one-third of the effective spread. Past work on estimating spread components typically omits the search component. Our estimates suggest this omission is important.

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