Trading activity and price impact in parallel markets: SETS vs. off-book market at the London Stock Exchange

We study empirically the trading activity in the electronic on-book segment and in thedealership off-book segment of the London Stock Exchange, investigating separately thetrading of active market members and of other market participants who are non-members.We find that (i) the volume distribution of off-book transactions has a significantly fatter tailthan that of on-book transactions, (ii) groups of members and non-members can be classified incategories according to their trading profile, (iii) there is a strong anticorrelation between thedaily inventory variation of a market member due to on-book market transactions and aninventory variation due to off-book market transactions with non-members, and (iv) theautocorrelation of the sign of the orders of non-members in the off-book market is slowlydecaying. We also analyse the on-book price impact function over time, both for positive andnegative lags, of the electronic trades and of the off-book trades. The unconditional impactcurves are very different for the electronic trades and the off-book trades. Moreover, there is asmall dependence of the impact on the volume for the on-book electronic trades, while the shapeand magnitude of the impact function of off-book transactions strongly depend on volume.