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Trader Anonymity, Price Formation and Liquidity


  • THIESSEN, Eric


We analyze price formation and liquidity in a non-anonymous specialist market. Our main hypothesis is that the non-anonymity allows the specialist to assess the probability that a trader trades on the basis of private information. He uses this knowledge to price discriminate. This can be achieved by quoting a large spread and granting price improvement to traders deemed uninformed. Our empirical results confirm this view. We document that price improvement reflects lower adverse selection costs but does not lead to a reduction in the specialist's profit. We further show that the quote adjustment following transactions at the quoted prices is more pronounced than the quote adjustment after transactions at prices inside the spread. The results thus support the notion that a non-anonymous environment allows the identification of informed traders and may thus alleviate the adverse selection problem.

Suggested Citation

  • THIESSEN, Eric, 2000. "Trader Anonymity, Price Formation and Liquidity," Les Cahiers de Recherche 701, HEC Paris.
  • Handle: RePEc:ebg:heccah:0701

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    References listed on IDEAS

    1. Chung, Kee H. & Van Ness, Bonnie F. & Van Ness, Robert A., 1999. "Limit orders and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 53(2), pages 255-287, August.
    2. Nicholas Economides & Robert A. Schwartz,, "undated". "Equity Trading Practices and Market Structure: Assessing Asset Managers' Demand for Immediacy," Financial Networks 9508, Economics of Networks.
    3. Admati, Anat R & Pfleiderer, Paul, 1991. "Sunshine Trading and Financial Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 443-481.
    4. Ellis, Katrina & Michaely, Roni & O'Hara, Maureen, 2000. "The Accuracy of Trade Classification Rules: Evidence from Nasdaq," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 529-551, December.
    5. Benveniste, Lawrence M. & Marcus, Alan J. & Wilhelm, William J., 1992. "What's special about the specialist?," Journal of Financial Economics, Elsevier, vol. 32(1), pages 61-86, August.
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    More about this item


    Anonymity; specialist; bid-ask spread;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)


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