This paper studies the behavior of specialist dealers in choosing to make markets in securities. Our setting is the 19th century London Stock Exchange and the universe of securities listed on the exchange in the 1870s. In line with the findings of recent literature, our estimates show that specialist dealers concentrated their market-making in the most liquid securities. The LSE was a free-entry dealer market, where dealers were free to choose which securities to deal in. In this context, we show that up to 80% of securities were orphaned with no specialist offering immediate execution. A combination of adverse selection and inventory costs prevented the development of liquid markets in most securities, with dealers opting instead to provide match-making services. Our findings are consistent with recent research on the possibility of liquidity bifurcation and market fragility.

This talk is presented by the Economic History Seminar, sponsored by the Department of Economics with generous gifts given through the Harrison Metal Visiting Scholar Award Fund and the Economics Strategic Fund.