The Market Structure of Nasdaq Dealer Markets and Quoting Conventions
AbstractThe well-publicized Christie-Schultz collusion hypothesis provides an experiment for studying the determinants of market structure in Nasdaq markets. Some markets experienced substantial compression in the profit margins for market makers due to the change of quoting convention from odd-eighth avoidance to the use of the full spectrum of eighths. Contrary to what competitive theory predicts, the empirical results suggest that this change led to net entry of market makers, after controlling for a time fixed effect, trading activity, information aspects of trading, market size, volatility, and unobserved individual market effects. Moreover, the robustness and significance of this finding do not change as different estimation methods are employed to correct for possible self-selection bias of the estimated average treatment effect. Surprisingly, dealer firms entered these markets despite the compression of profit margins. An explanation is provided based on collusion and investment in entry deterrence related to the practice of ``preferencing".
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-357.
Length: 52 pages
Date of creation: Aug 2005
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-15 (All new papers)
- NEP-COM-2005-10-15 (Industrial Competition)
- NEP-FIN-2005-10-15 (Finance)
- NEP-FMK-2005-10-15 (Financial Markets)
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