The Effect of Market Structure on the Incentives to Quote Aggressively: An Empirical Study of Nasdaq Market Makers |
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Authors: | Mark Klock & D Timothy McCormick |
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Institution: | The George Washington University,;Nasdaq, Inc. |
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Abstract: | We use data on Nasdaq stocks to study arguments that preferencing reduces incentives to quote competitively. We examine a market maker's volume as a function of various measures of quoting aggressiveness. We find that more aggressive quoting does indeed result in more business. We also examine the relation between volume and quote aggressiveness as a function of the competitiveness. We find that in less (more) competitive markets, increased quote aggressiveness has a smaller (larger) impact on market share. We argue that preferencing arrangements could be more harmful to public investors in markets where competition is weak. |
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Keywords: | quote aggressiveness order flow market structure preferencing market regulation |
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