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An empirical analysis of specialist trading behavior at the New York Stock Exchange

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  • Sigridur Benediktsdottir
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    Abstract

    I establish stylized empirical facts about the trading behavior of New York Stock Exchange specialists. Specifically, I look at the effect of future price movements, the specialist's explicit role, and the specialist's inventory levels on specialist trading behavior. The motivation for this empirical study is to infer whether the specialist behaves like an active investor who has an information advantage which he obtains while acting as a broker for other traders. If this were the case, one would expect that the specialist would engage in a profit maximizing strategy, buying low and selling high, which is opposite to the prediction of the traditional inventory model. I find that specialists behave like active investors who seek to buy stocks when prices are low and to sell when prices are high. I also find that when specialists are not performing their trading obligations of being on the opposite side of the market they are in almost 85 percent of their trades, buying low and selling high. The findings of this paper indicate that the NYSE specialist is best represented in theoretical models as a constrained profit maximizing, informed investor rather than as a zero profit trader.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 876.

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    Date of creation: 2006
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    Handle: RePEc:fip:fedgif:876

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    Keywords: Stockbrokers ; Stock market;

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    1. Madhavan, Ananth & Sofianos, George, 1998. "An empirical analysis of NYSE specialist trading," Journal of Financial Economics, Elsevier, vol. 48(2), pages 189-210, May.
    2. Madhavan, Ananth & Smidt, Seymour, 1991. "A Bayesian model of intraday specialist pricing," Journal of Financial Economics, Elsevier, vol. 30(1), pages 99-134, November.
    3. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
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    12. Madhavan, Ananth & Smidt, Seymour, 1993. " An Analysis of Changes in Specialist Inventories and Quotations," Journal of Finance, American Finance Association, vol. 48(5), pages 1595-1628, December.
    13. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
    14. Ekkehart Boehmer & Gideon Saar & Lei Yu, 2005. "Lifting the Veil: An Analysis of Pre-trade Transparency at the NYSE," Journal of Finance, American Finance Association, vol. 60(2), pages 783-815, 04.
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    16. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
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    Cited by:
    1. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4.

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