Do brokers' recommendation changes generate brokerage? Evidence from a central limit order market

We examine the short-term response to recommendation changes on the Australian Securities Exchange, a central limit order market. In both central limit order markets and dealer-driven markets, clients may reward the recommending broker with increased trade volumes. But a central limit order market does not have mandatory market makers and hence provides greater opportunity to free ride. We find evidence supporting the hypothesis that recommending brokers are rewarded with higher trade volumes and brokerage commission. Consistent with the tipping hypothesis, these rewards are concentrated in the period shortly before the release. There is no evidence of free riding.