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Local market makers, liquidity and market quality

  • Kedia, Simi
  • Zhou, Xing
Registered author(s):

    We examine the role of geographically proximate (local) market makers in providing liquidity and improving the quality of a dealer market. Firms with active participation of local dealers enjoy lower quoted and effective spreads, as well as more informative prices. The beneficial effects from local market makers are not confined to a few "top" local dealers and they cannot be attributed to their participation in the firm's IPO syndicate or industry specialization. Further, we find that days with aggressive bidding from local market makers relative to their non-local counterparts are associated with significant positive abnormal returns, consistent with local market makers possessing information advantages. In summary, our results suggest that the information advantages of local market makers may be a contributing factor to the reduction in the cost of trading.

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    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 14 (2011)
    Issue (Month): 4 (November)
    Pages: 540-567

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    Handle: RePEc:eee:finmar:v:14:y:2011:i:4:p:540-567
    Contact details of provider: Web page: http://www.elsevier.com/locate/finmar

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