(Reuters) - Banks that trade the stock of companies they make loans to have superior information, which can help investors trading in equities and hurt customers trading loans, according to a study.
The study, by business school professors at Baruch College and Pace University in New York, looked at so-called “dual market makers” - banks that simultaneously were the lead lenders to companies and traded their shares with investors.
In markets where there are dual market makers, dealers tend to buy shares from investors at higher prices and sell them at lower prices compared with markets without dual market makers.
That means equity investors were getting a better deal whether they were buying or selling shares in the stock market, which tends to trade actively.
But in the loan markets, which trade much less frequently, the presence of dual market makers translated to inferior pricing for investors, the study said.
Dual market makers reduced equity bid-ask spreads - the highest price at which someone will buy a stock and the lowest price someone will sell it - by about 39.5 basis points or some 35 percent of the mean equity spread.
But the presence of dual market makers increased spreads in the syndicated loan market by around 25.3 basis points, or 21 percent of the mean loan spread, which minimizes liquidity.
The study, titled “The impact of joint participation on liquidity in equity and syndicated bank loan markets” was published in the January issue of the Journal of Financial Intermediation.
Reporting by Olivia Oran in New York; editing by Dan Wilchins and Andre Grenon
Our Standards: The Thomson Reuters Trust Principles.