Entry, exit, market makers, and the bid-ask spread

The probability of entry and exit of dealers on the NASDAQ NationalMarket (NNM) is significantly affected by trading intensity,volatility and the quoted bid-ask spread. Entry and exit ofmarket makers is a pervasive phenomenon. Large-scale entry (exit)is associated with substantial declines (increases) in quotedend-of-day inside spreads, even after controlling for the effectsof changes in volume and volatility. The spread changes arelarger in magnitude for issues with few market makers; however,even for issues with a large number of market makers, substantialchanges in quoted spreads take place. The results are consistentwith the competitive model of dealer pricing.