IDEAS home Printed from https://ideas.repec.org/a/bla/jbfnac/v31y2004i7-8p1069-1097.html
   My bibliography  Save this article

Making a Market with Spreads and Depths

Author

Listed:
  • Kee H. Chung
  • Xin Zhao

Abstract

In this paper we study the quote revision behavior of NASDAQ market makers by analyzing inter‐temporal changes in their spread and depth quotes. Using individual dealer quote and trade data for a sample of 2,319 stocks, we find that NASDAQ dealers make more frequent revisions in depths than in spreads and the extent of liquidity management is greater for stocks of smaller companies, lower‐priced stocks, and stocks with larger trade sizes and fewer number of transactions. We show that intraday variation in the number of quote revisions follows the U‐shaped pattern, indicating that the extent of liquidity management is greater during the early and late hours of trading than during midday.

Suggested Citation

  • Kee H. Chung & Xin Zhao, 2004. "Making a Market with Spreads and Depths," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7‐8), pages 1069-1097, September.
    • Handle: RePEc:bla:jbfnac:v:31:y:2004:i:7-8:p:1069-1097
    DOI: 10.1111/j.0306-686X.2004.00567.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.0306-686X.2004.00567.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.0306-686X.2004.00567.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Kavajecz, Kenneth A & Odders-White, Elizabeth R, 2001. "An Examination of Changes in Specialists' Posted Price Schedules," The Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 681-704.
    2. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
    3. Oliver Hansch & Narayan Y. Naik & S. Viswanathan, 1999. "Preferencing, Internalization, Best Execution, and Dealer Profits," Journal of Finance, American Finance Association, vol. 54(5), pages 1799-1828, October.
    4. Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-374.
    5. Glosten, Lawrence R, 1989. "Insider Trading, Liquidity, and the Role of the Monopolist Specialist," The Journal of Business, University of Chicago Press, vol. 62(2), pages 211-235, April.
    6. Barclay, M.J. & Smith, C.W., 1988. "Corporate Payout Policy: Cash Dividencds Versus Open- Market Repurchases," Papers 88-10, Rochester, Business - Managerial Economics Research Center.
    7. Tinic, Seha M. & West, Richard R., 1972. "Competition and the Pricing of Dealer Service in the Over-the-Counter Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(3), pages 1707-1727, June.
    8. Seha M. Tinic, 1972. "The Economics of Liquidity Services," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 86(1), pages 79-93.
    9. Goldstein, Michael A. & A. Kavajecz, Kenneth, 2000. "Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE," Journal of Financial Economics, Elsevier, vol. 56(1), pages 125-149, April.
    10. Stoll, Hans R, 1978. "The Supply of Dealer Services in Securities Markets," Journal of Finance, American Finance Association, vol. 33(4), pages 1133-1151, September.
    11. Jennings, Robert, 1994. "Intraday Changes in Target Firms' Share Price and Bid-Ask Quotes around Takeover Announcements," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(2), pages 255-270, Summer.
    12. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
    13. Cohen, Kalman J & Maier, Steven F & Schwartz, Robert A & Whitcomb, David K, 1981. "Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 287-305, April.
    14. Chiang, Raymond & Venkatesh, P C, 1988. " Insider Holdings and Perceptions of Information Asymmetry: A Note," Journal of Finance, American Finance Association, vol. 43(4), pages 1041-1048, September.
    15. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    16. Dupont, Dominique, 2000. "Market Making, Prices, and Quantity Limits," The Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 1129-1151.
    17. Barclay, Michael J. & Smith, Clifford Jr., 1988. "Corporate payout policy : Cash Dividends versus Open-Market Repurchases," Journal of Financial Economics, Elsevier, vol. 22(1), pages 61-82, October.
    18. Harris, Lawrence & Hasbrouck, Joel, 1996. "Market vs. Limit Orders: The SuperDOT Evidence on Order Submission Strategy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(2), pages 213-231, June.
    19. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
    20. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(1), pages 33-53.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Mingsheng & McCormick, Timothy & Zhao, Xin, 2005. "Order imbalance and liquidity supply: Evidence from the bubble burst of Nasdaq stocks," Journal of Empirical Finance, Elsevier, vol. 12(4), pages 533-555, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kee H. Chung & Xin Zhao, 2004. "Making a Market with Spreads and Depths," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7-8), pages 1069-1097.
    2. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017.
    3. repec:uts:finphd:34 is not listed on IDEAS
    4. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    5. Kothare, Meeta, 1997. "The effects of equity issues on ownership structure and stock liquidity: A comparison of rights and public offerings," Journal of Financial Economics, Elsevier, vol. 43(1), pages 131-148, January.
    6. Chung, Kee H. & Van Ness, Bonnie F. & Van Ness, Robert A., 1999. "Limit orders and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 53(2), pages 255-287, August.
    7. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    8. Silva, Ana Cristina & Chavez, Gonzalo, 2002. "Components of execution costs: evidence of asymmetric information at the Mexican Stock Exchange," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(3), pages 253-278, July.
    9. Pronk, M., 2002. "Market liquidity around earnings announcements," Other publications TiSEM 3e22cd8d-f7eb-4c28-9275-8, Tilburg University, School of Economics and Management.
    10. Chakravarty, Sugato & Harris, Fredreck H. deB. & Wood, Roger A., 2001. "Do Bid-Ask Spreads or Bid and Ask Depths Convey New Information First?," Purdue University Economics Working Papers 1149, Purdue University, Department of Economics.
    11. Ahn, Hee-Joon & Cai, Jun & Hamao, Yasushi & Ho, Richard Y. K., 2002. "The components of the bid-ask spread in a limit-order market: evidence from the Tokyo Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 9(4), pages 399-430, November.
    12. João A. C. Santos & Pei Shao, 2023. "Investor Diversity and Liquidity in The Secondary Loan Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(3), pages 249-272, June.
    13. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, M., 2004. "Market evidence on the opaqueness of banking firms' assets," Journal of Financial Economics, Elsevier, vol. 71(3), pages 419-460, March.
    14. Mao, Wen & Pagano, Michael S., 2011. "Specialists as risk managers: The competition between intermediated and non-intermediated markets," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 51-66, January.
    15. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2013.
    16. Gibson, Scott & Singh, Rajdeep & Yerramilli, Vijay, 2003. "The effect of decimalization on the components of the bid-ask spread," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 121-148, April.
    17. M. Frömmel & F Van Gysegem, 2014. "Bid-Ask Spread Components on the Foreign Exchange Market: Quantifying the Risk Component," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/878, Ghent University, Faculty of Economics and Business Administration.
    18. Ardalan, Kavous, 1999. "The no-arbitrage condition and financial markets with transaction costs and heterogeneous information: The bid-ask spread," Global Finance Journal, Elsevier, vol. 10(1), pages 83-91.
    19. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    20. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    21. Brockman, Paul & Chung, Dennis Y., 1999. "An analysis of depth behavior in an electronic, order-driven environment," Journal of Banking & Finance, Elsevier, vol. 23(12), pages 1861-1886, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jbfnac:v:31:y:2004:i:7-8:p:1069-1097. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.