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The optimal bid/ask spread in a Specialist System

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  • Castellano, Rosella
  • Cerqueti, Roy

Abstract

In this work we propose a simple market model where some features of the Specialist System are analyzed. In particular, the specialist's obligation to display bid/ask quotes on the book within the bounds imposed by the Exchange is considered. The proposed model allows to analyze the effects of the specialist's interventions on the short term dynamics of bid/ask prices and address a relevant market design issue, that is determination and analysis of the optimal endogenous upper bound that - according to economic conditions - should be imposed by Stock Exchange on the quoted bid/ask spread. The institutional details are summarized in a few structural parameters and the focus is on the aggregate effects of excess demand/supply.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 5 (September)
Pages: 2247-2253

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:5:p:2247-2253

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Dynamic optimization Maximum spread Specialist Regulated Brownian Motion;

References

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  12. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
  13. Goldman, M Barry & Beja, Avraham, 1979. "Market Prices vs. Equilibrium Prices: Returns' Variance, Serial Correlation, and the Role of the Specialist," Journal of Finance, American Finance Association, vol. 34(3), pages 595-607, June.
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  16. Anand, Amber & Weaver, Daniel G., 2006. "The value of the specialist: Empirical evidence from the CBOE," Journal of Financial Markets, Elsevier, vol. 9(2), pages 100-118, May.
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