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Liquidity Provision and the Organizational Form of NYSE Specialist Firms

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  • Jay F. Coughenour
  • Daniel N. Deli

Abstract

We examine the influence of NYSE specialist firm organizational form on the nature of liquidity provision. We compare closely held firms whose specialists provide liquidity with their own capital to widely held firms whose specialists provide liquidity with diffusely owned capital. We argue that specialists using their own capital have a greater incentive and ability to reduce adverse selection costs, but face a greater cost of capital. Differences in the proportion of spreads due to adverse selection costs, large trade frequency, the sensitivity between depth and spreads, and price stabilization support this argument.

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  • Jay F. Coughenour & Daniel N. Deli, 2002. "Liquidity Provision and the Organizational Form of NYSE Specialist Firms," Journal of Finance, American Finance Association, vol. 57(2), pages 841-869, April.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:2:p:841-869
    DOI: 10.1111/1540-6261.00444
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    Cited by:

    1. Paolo Pasquariello & Clara Vega, 2015. "Strategic Cross-Trading in the U.S. Stock Market," Review of Finance, European Finance Association, vol. 19(1), pages 229-282.
    2. Charles Ka Yui Leung & Chung-Yi Tse, 2012. "Flippers in Housing Market Search," 2012 Meeting Papers 434, Society for Economic Dynamics.
    3. O’Sullivan, Conall & Papavassiliou, Vassilios G., 2020. "On the term structure of liquidity in the European sovereign bond market," Journal of Banking & Finance, Elsevier, vol. 114(C).
    4. Anand, Amber & Chakravarty, Sugato & Chuwonganant, Chairat, 2009. "Cleaning house: Stock reassignments on the NYSE," Journal of Financial Markets, Elsevier, vol. 12(4), pages 727-753, November.
    5. Goldstein, Michael A. & Namin, Elmira Shekari, 2023. "Corporate bond liquidity and yield spreads: A review," Research in International Business and Finance, Elsevier, vol. 65(C).
    6. Bülent Köksal, 2010. "Differences in individual NYSE specialists' performances and strategies," Review of Financial Economics, John Wiley & Sons, vol. 19(1), pages 8-18, January.
    7. Anand, Amber, 2005. "Specialist: The firm or the individual?: Empirical evidence from the options markets," Journal of Economics and Business, Elsevier, vol. 57(6), pages 555-575.
    8. Brian T. McCann & Govert Vroom, 2014. "Competitive Behavior and Nonfinancial Objectives: Entry, Exit, and Pricing Decisions in Closely Held Firms," Organization Science, INFORMS, vol. 25(4), pages 969-990, August.
    9. Boulatov, Alex & Hatch, Brian C. & Johnson, Shane A. & Lei, Adam Y.C., 2009. "Dealer attention, the speed of quote adjustment to information, and net dealer revenue," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1531-1542, August.
    10. Fabrice Roth, 2012. "Crise et régulation des marchés financiers : Quel impact sur les formes mutuelles dans l'assurance ?," Working Papers halshs-00692342, HAL.
    11. Hatch, Brian C. & Johnson, Shane A., 2002. "The impact of specialist firm acquisitions on market quality," Journal of Financial Economics, Elsevier, vol. 66(1), pages 139-167, October.
    12. Stefan Gissler, 2015. "Slow capital, fast prices: Shocks to funding liquidity and stock price reversals," Finance and Economics Discussion Series 2015-43, Board of Governors of the Federal Reserve System (U.S.).
    13. Avanidhar Subrahmanyam, 2005. "Distinguishing Between Rationales for Short‐Horizon Predictability of Stock Returns," The Financial Review, Eastern Finance Association, vol. 40(1), pages 11-35, February.
    14. Buti, Sabrina, 2007. "A Challenger to the Limit Order Book: The NYSE Specialist," SIFR Research Report Series 55, Institute for Financial Research.
    15. Shane A. Corwin & Jay F. Coughenour, 2008. "Limited Attention and the Allocation of Effort in Securities Trading," Journal of Finance, American Finance Association, vol. 63(6), pages 3031-3067, December.
    16. Coughenour, Jay F. & Saad, Mohsen M., 2004. "Common market makers and commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 73(1), pages 37-69, July.
    17. Patricia C. Mosser & Joseph Tracy & Joshua Wright, 2013. "The capital structure and governance of a mortgage securitization utility," Staff Reports 644, Federal Reserve Bank of New York.

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