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The Specialist`s Participation in Quoted Prices and the NYSE`s Price Continuity Rule

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  • Marios Panayides

    ()
    (International Center for Finance, Yale University)

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    Abstract

    There is a significant disparity between theoretical and empirical models on the Specialist`s adjustment of inventory risk. Whereas theoretical work has shown that Specialist inventory rebalancing through the quoted prices is important to the functioning of the market, empiricists have failed to identify any evidence of this action intradaily. By partitioning the Specialist actions as active or passive, conditioned on the Price Continuity Rule, this study shows that the Specialist engages in active inventory rebalancing throughout the trading day. The paper finds that the Specialist`s obligations -set by the NYSE- of achieving price continuity and smooth price changes come at a significant cost for the Specialist. However, he manages to mitigate this cost through his own actions when the rules are not binding. The implications of this paper have direct bearing on the current debate as to whether the NYSE design should be restructured.

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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm442.

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    Date of creation: 28 Jul 2004
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    Handle: RePEc:ysm:somwrk:ysm442

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    Web page: http://icf.som.yale.edu/
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    Keywords: Quoted Prices;

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