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Do Dealers Infer Information From Order Flow?

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  • Bidisha Chakrabarty
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    Abstract

    I examine strategic behavior among dealers in the NASDAQ market and document that there is a lead quote-setting dealer in each security and that the quotes posted by this leader are informative. Other dealers free-ride this information by following the lead quote-setting dealer. The lead dealer can be identified by two information signals: (1) percentage of time spent on the inside market (i.e., posting inside quotes), and (2) trade volume transacted. Dealers that free-ride the leader's quotes quickly update their posted quotes in the same direction as the leader's quote change. My findings suggest that directing trade to the lead dealer may be more advantageous than randomly routing trade. 2007 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): 30 (2007)
    Issue (Month): 2 ()
    Pages: 181-200

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    Handle: RePEc:bla:jfnres:v:30:y:2007:i:2:p:181-200

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    Web page: http://www.southwesternfinance.org/
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    Cited by:
    1. Charles Cao & Oliver Hansch & Xiaoxin Wang, 2008. "Order Placement Strategies In A Pure Limit Order Book Market," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 31(2), pages 113-140.

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