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Price And Quantity Quotes On Nasdaq: A Study Of Dealer Quotation Behavior

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  • Kee H. Chung
  • Xin Zhao
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    Abstract

    We show that the majority of quotes posted by NASDAQ dealers are noncompetitive and only 19.5% (18.4%) of bid (ask) quotes are at the inside. The percentage of dealer quotes that are at the inside is higher for stocks with wider spreads, fewer market makers, and more frequent trading, and lower for stocks with larger trade sizes and higher return volatility. These results support our conjecture that dealers have greater incentives to be at the inside for stocks with larger market-making revenues and smaller costs. Dealers post large depths when their quotes are at the inside and frequently quote the minimum required depth when they are not at the inside. The latter quotation behavior leads to the negative intertemporal correlation between dealer spread and depth. 2004 The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 27 (2004)
    Issue (Month): 4 ()
    Pages: 497-519

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    Handle: RePEc:bla:jfnres:v:27:y:2004:i:4:p:497-519

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    Cited by:
    1. Chung, Kee H. & Chuwonganant, Chairat, 2007. "Quote-based competition, market share, and execution quality in NASDAQ-listed securities," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2770-2795, September.
    2. Bruce Mizrach, 2008. "The next tick on Nasdaq," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 19-40.

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