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The Making of a Dealer Market: From Entry to Equilibrium in the Trading of Nasdaq Stocks


  • Katrina Ellis

    (University of California Davis,)

  • Roni Michaely

    (Cornell University and IDC,)

  • Maureen O'Hara

    (Cornell University)


This paper provides an analysis of the nature and evolution of a dealer market for Nasdaq stocks. Despite size differences in sample stocks, there is a surprising consistency to their trading. One dealer tends to dominate trading in a stock. Markets are concentrated and spreads are increasing in the volume and market share of the dominant dealer. Entry and exit are ubiquitous. Exiting dealers are those with very low profits and trading volume. Entering market makers fail to capture a meaningful share of trading or profits. Thus, free entry does little to improve the competitive nature of the market as entering dealers have little impact. We find, however, that for small stocks, the Nasdaq dealer market is being more competitive than the specialist market. Copyright The American Finance Association 2002.

Suggested Citation

  • Katrina Ellis & Roni Michaely & Maureen O'Hara, 2002. "The Making of a Dealer Market: From Entry to Equilibrium in the Trading of Nasdaq Stocks," Journal of Finance, American Finance Association, vol. 57(5), pages 2289-2316, October.
  • Handle: RePEc:bla:jfinan:v:57:y:2002:i:5:p:2289-2316

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    References listed on IDEAS

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    5. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
    6. Allan Drazen, 2000. "Political Contagion in Currency Crises," NBER Chapters,in: Currency Crises, pages 47-67 National Bureau of Economic Research, Inc.
    7. Paul Cashin & Manmohan S. Kumar & C. John McDermott, 1995. "International Integration of Equity Markets and Contagion Effects," IMF Working Papers 95/110, International Monetary Fund.
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