Trader Anonymity, Price Formation and Liquidity
AbstractWe analyze price formation and liquidity in a non-anonymous specialist market. Our main hypothesis is that the non-anonymity allows the specialist to assess the probability that a trader trades on the basis of private information. He uses this knowledge to price discriminate. This can be achieved by quoting a large spread and granting price improvement to traders deemed uninformed. Our empirical results confirm this view. We document that price improvement reflects lower adverse selection costs but does not lead to a reduction in the specialist's profit. We further show that the quote adjustment following transactions at the quoted prices is more pronounced than the quote adjustment after transactions at prices inside the spread. The results thus support the notion that a non-anonymous environment allows the identification of informed traders and may thus alleviate the adverse selection problem.
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Bibliographic InfoPaper provided by HEC Paris in its series Les Cahiers de Recherche with number 701.
Length: 36 pages
Date of creation: 01 Feb 2000
Date of revision:
Anonymity; specialist; bid-ask spread;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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- Benveniste, Lawrence M. & Marcus, Alan J. & Wilhelm, William J., 1992. "What's special about the specialist?," Journal of Financial Economics, Elsevier, vol. 32(1), pages 61-86, August.
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