Missing markets. Microstructure and liquidity on the London Stock Exchange

This paper studies the behavior of specialist dealers operating in the London Stock Exchange in the 1870s. The LSE was a free-entry exclusive dealers market, where dealers were free to choose which securities to deal in. We show that dealers concentrated their market making in the most liquid securities. A combination of adverse selection and inventory costs prevented the development of liquid markets in most securities, with dealers opting instead to provide matchmaking services. Our results call for a reappreciation of the liquidity of the London market and offer a new interpretation of stylized facts about the Victorian investor behavior.