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The Impact of Market Maker Competition on Nasdaq Spreads

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  • Klock, Mark
  • McCormick, D Timothy

Abstract

This study utilizes a comprehensive database containing monthly information on the number of market makers for about 5,288 Nasdaq securities over an eight-year period to investigate the impact of competition on spreads. A variety of models are estimated in order to demonstrate the robustness of the results that include four specific findings: (1) the number of market makers has a negative and highly significant impact on spreads; (2) the relationship is nonlinear with a decreasing impact by the marginal market maker; (3) Nasdaq spreads have been declining over time; and (4) structural changes in Nasdaq are associated with significant changes in the relationship between spread and the number of market makers. One improvement over the literature includes allowing endogenous competition through the use of instrumental variables. Copyright 1999 by MIT Press.

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Bibliographic Info

Article provided by Eastern Finance Association in its journal The Financial Review.

Volume (Year): 34 (1999)
Issue (Month): 4 (November)
Pages: 55-73

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Handle: RePEc:bla:finrev:v:34:y:1999:i:4:p:55-73

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Web page: http://www.easternfinance.org/
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Web: http://www.blackwellpublishing.com/subs.asp?ref=0732-8516

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Cited by:
  1. Bruce Mizrach, 2002. "The Next Tick on Nasdaq: Does Level II Information Matter?," Departmental Working Papers 200202, Rutgers University, Department of Economics.
  2. Jonathan Brogaard & Corey Garriott & Anna Pomeranets, 2014. "High-Frequency Trading Competition," Working Papers 14-19, Bank of Canada.
  3. Chung, Kee H. & Kim, Youngsoo, 2005. "The dynamics of dealer markets and trading costs," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3041-3059, December.
  4. Bruce Mizrach, 2006. "Does SIZE Matter? Liquidity Provision by the Nasdaq Anonymous Trading Facility," Departmental Working Papers 200602, Rutgers University, Department of Economics.
  5. Bruce Mizrach, 2008. "The next tick on Nasdaq," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 19-40.
  6. Locke, Peter R. & Sarajoti, Pattarake, 2004. "Aggressive dealer pricing," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(4), pages 559-573, September.
  7. Joe Chen, 2005. "The Market Structure of Nasdaq Dealer Markets and Quoting Conventions," CARF F-Series CARF-F-040, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  8. Chung, Kee H. & Chuwonganant, Chairat & McCormick, D. Timothy, 2004. "Order preferencing and market quality on NASDAQ before and after decimalization," Journal of Financial Economics, Elsevier, vol. 71(3), pages 581-612, March.
  9. Chung, Kee H. & Chuwonganant, Chairat & McCormick, D. Timothy, 2006. "Does internalization diminish the impact of quote aggressiveness on dealer market share?," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 108-131, January.
  10. Joe Chen, 2005. "The Market Structure of Nasdaq Dealer Markets and Quoting Conventions," CIRJE F-Series CIRJE-F-357, CIRJE, Faculty of Economics, University of Tokyo.

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