Trader Anonymity, Price Formation and Liquidity
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.
|Date of creation:||01 Feb 2000|
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- Nicholas Economides & Robert A. Schwartz,, "undated".
"Equity Trading Practices and Market Structure: Assessing Asset Managers' Demand for Immediacy,"
9508, Economics of Networks.
- Nicholas Economides & Robert A. Schwartz, 1995. "Equity Trading Practices and Market Structure: Assessing Asset Managers' Demand for Immediacy," Working Papers 95-08, New York University, Leonard N. Stern School of Business, Department of Economics.
- 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.
- 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.
- 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.
- 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. Full references (including those not matched with items on IDEAS)
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