Trading mechanisms and market quality: Limit-order books versus dealership markets

•We compare the market quality of the dealer market and limit order book market.•We highlight the key is that the different pricing rules in the two markets.•The market quality of each market depends on the size of orders.•The market quality of a hybrid competitive dominates the two pure markets.

We compare the market quality of the dealer market and limit order book (LOB) market in a unified framework. We find that, in terms of liquidity and gains from trade, dealer market performs better when the order size is small, while LOB market performs better when the order size is large. A competitive hybrid market where the dealer marker and the LOB market compete with each other dominates the two pure markets.