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Clustering and Competition in Asset Markets

  • Grossman, Sanford J, et al

Economists, financial commentators, regulatory agencies, and the legal community have recently criticized the Nasdaq Stock Market, Inc., because there is greater clustering of stock quotations on even-eighths on Nasdaq than on the New York Stock Exchange or the American Stock Exchange, a phenomenon which critics attribute to collusion or some other defect in Nasdaq market structure. However as this article demonstrates, clustering occurs in varying degrees in many other incontestably competitive financial markets, including the NYSE, the AMEX, the London Stock Exchange, the London gold market, and the international foreign exchange market. This article provides a competitive theory of clustering that emphasizes the effect of uncertainty, the size of transactions, volatility, and the informational and transactional roles of quotations on the degree of clustering In addition, the article examines how market structure can affect the degree of clustering and considers the relation between clustering, spreads, and investors' transactions costs. Coauthors are Merton H. Miller, Kenneth R. Cone, Daniel R. Fischel, and David J. Ross. Copyright 1997 by the University of Chicago.

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File URL: http://dx.doi.org/10.1086/467365
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Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 40 (1997)
Issue (Month): 1 (April)
Pages: 23-60

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Handle: RePEc:ucp:jlawec:v:40:y:1997:i:1:p:23-60
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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  1. Harris, Lawrence E, 1994. "Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 149-78.
  2. Dale, Charles, 1981. "Brownian motion in the treasury bill futures market," MPRA Paper 46530, University Library of Munich, Germany.
  3. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  4. Clifford A. Ball & Walter N. Torous & Adrian E. Tschoegl, 1985. "The degree of price resolution: The case of the gold market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 5(1), pages 29-43, 03.
  5. Sanger, Gary C. & McConnell, John J., 1986. "Stock Exchange Listings, Firm Value, and Security Market Efficiency: The Impact of NASDAQ," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(01), pages 1-25, March.
  6. Van Horne, James C, 1970. "New Listings and Their Price Behavior," Journal of Finance, American Finance Association, vol. 25(4), pages 783-94, September.
  7. Stevenson, Richard A & Bear, Robert M, 1970. "Commodity Futures: Trends or Random Walks?," Journal of Finance, American Finance Association, vol. 25(1), pages 65-81, March.
  8. Kadlec, Gregory B & McConnell, John J, 1994. " The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings," Journal of Finance, American Finance Association, vol. 49(2), pages 611-36, June.
  9. Loughran, Tim, 1993. "NYSE vs NASDAQ returns : Market microstructure or the poor performance of initial public offerings?," Journal of Financial Economics, Elsevier, vol. 33(2), pages 241-260, April.
  10. Harris, Lawrence, 1991. "Stock Price Clustering and Discreteness," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 389-415.
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