Abstract: | The effects of large transactions on OTC security dealers' bid-ask spreads are analyzed for stocks with different price levels. Because overhead expenses vary little with the value of transactions, economies of scale exist for dealers in higher-priced stocks. Thus, percentage bid-ask spreads decline with the price level of the stock. However, larger transactions entail larger order-clearing and inventory-adjustment costs. These costs may be particularly burdensome for smaller dealers with limited purchasing powers and abilities to diversify inexpensively. Consequently, smaller dealers charge higher spreads for trading high-priced stocks. |