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The Impact Of Market Maker Concentration On Adverse-Selection Costs For Nasdaq Stocks

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  • Bonnie F. Van Ness
  • Robert A. Van Ness
  • Richard S. Warr

Abstract

We examine the impact of market maker concentration on adverse-selection costs for NASDAQ stocks and find that more market makers results in lower costs. Furthermore, this reduction in adverse selection exceeds the overall reduction in spreads that is attributable to market maker competition. We hypothesize that order flow internalization is increasing in market makers and allows for greater information production, and is an explanation for our findings. Our results provide an explanation for the puzzle documented by previous work that finds that adverse-selection costs for NASDAQ tend to be lower than for the New York Stock Exchange, whereas spreads tend to be higher. 2005 The Southern Finance Association and the Southwestern Finance Association.

Suggested Citation

  • Bonnie F. Van Ness & Robert A. Van Ness & Richard S. Warr, 2005. "The Impact Of Market Maker Concentration On Adverse-Selection Costs For Nasdaq Stocks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(3), pages 461-485.
  • Handle: RePEc:bla:jfnres:v:28:y:2005:i:3:p:461-485
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    Cited by:

    1. Tao Zhang & Larry A. Cox & Robert A. Van Ness, 2009. "Adverse Selection and the Opaqueness of Insurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 295-321.
    2. Jonathan Brogaard & Corey Garriott & Anna Pomeranets, 2014. "High-Frequency Trading Competition," Staff Working Papers 14-19, Bank of Canada.
    3. Qianyun Huang & Terrance R. Skantz, 2016. "The informativeness of pro forma and street earnings: an examination of information asymmetry around earnings announcements," Review of Accounting Studies, Springer, vol. 21(1), pages 198-250, March.
    4. repec:eee:ecmode:v:66:y:2017:i:c:p:121-131 is not listed on IDEAS

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