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Are Market Makers Uninformed and Passive? Signing Trades in The Absence of Quotes

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  • Michel van der Wel

    (Erasmus University Rotterdam, CREATES, ERIM)

  • Albert Menkveld

    (VU University Amsterdam)

  • Asani Sarkar

    (Federal Reserve Bank of New York)

Abstract

We develop a new likelihood-based approach to sign trades in the absence of quotes. It is equally efficient as existing MCMC methods, but more than 10 times faster. It can deal with the occurrence of multiple trades at the same time, and noisily observed trade times. We apply this method to a high-frequency dataset of the 30Y U.S. treasury futures to investigate the role of the market maker. Most theory characterizes him as an uninformed passive liquidity supplier. Our results suggest that some market makers actively demand liquidity for a substantial part of the day and are informed speculators.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-046/3.

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Date of creation: 25 May 2009
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Handle: RePEc:dgr:uvatin:20090046

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Keywords: market microstructure; signing trades; market makers; treasury futures; discount rate;

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