Market making in dealership markets
This dissertation consists of two essays examining the market-making process in dealership markets. The first essay examines market makers' quoting behavior for a sample of Nasdaq-listed stocks. The evidence indicates that market makers frequently revise their quotations but rarely post competitive prices on the Nasdaq system. Rather, they tend to post competitive prices on the Electronic Communication Network (ECN) systems. With a simultaneous equation model adopted to capture the interdependence between bid and ask quotes, this study demonstrates that the adverse selection is a major factor in explaining market makers' quote revising processes on the Nasdaq system, while the role of inventory control is insignificant. Further analysis suggests that preferenced trading greatly reduces the effectiveness of competitive quotations in market makers' inventory control processes, while the ECN systems provide Nasdaq market makers with an effective alternative tool to manage their inventory imbalances and even execute customer orders without posting competitive quotes on the Nasdaq system. The second essay investigates the competitiveness of the London market on the basis of trading activities of different market makers. The results show that London market makers can obtain relative larger shares of public order flows through posting more competitive prices with greater quote depths. No evidence is found to support that preferenced trading distort the market shares of trading among market makers because it is limited to small-sized trades. However, this study does suggest that those market makers who take more trading risks are not only rewarded with larger market shares of public order flow but also compensated with higher spread profit margins. The overall findings from the study indicate that the LSE is a competitive dealership market. ^
Business Administration, General|Economics, Finance
"Market making in dealership markets"
Dissertations and Master's Theses (Campus Access).