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Geographic proximity and price discovery: Evidence from NASDAQ

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  • Anand, Amber
  • Gatchev, Vladimir A.
  • Madureira, Leonardo
  • Pirinsky, Christo A.
  • Underwood, Shane

Abstract

We use the NASDAQ market making context to study the role of geographic proximity in the price discovery of a firm's stock. We show that market makers closer to the firm's headquarters spend more time at the inside bid and ask quotes, initiate larger changes in the quotes, and account for greater information share when compared to non-local market makers. Examining a sample of relocating firms, we also find that market makers moving farther away from the firm after relocation experience a reduction in their contributions to price discovery. Our results suggest that some (local) market makers possess superior information relative to other (non-local) market makers and they trade strategically on this information, a finding that challenges the traditional assumptions in market microstructure theory.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 14 (2011)
Issue (Month): 2 (May)
Pages: 193-226

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Handle: RePEc:eee:finmar:v:14:y:2011:i:2:p:193-226

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Web page: http://www.elsevier.com/locate/finmar

Related research

Keywords: Price discovery Quote quality Geographic location Market microstructure;

References

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Cited by:
  1. Ligon, James A. & Liu, Hao-Chen, 2013. "The relation of trade size and price contribution in a traditional foreign exchange brokered market," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 21(1), pages 1024-1045.
  2. Lescourret, Laurence, 2012. "Non-Fundamental Information and Market-Makers' Behavior during the NASDAQ Preopening Session," ESSEC Working Papers WP1212, ESSEC Research Center, ESSEC Business School.

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