The impact of designated market makers on security prices |
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| Authors: | Kalman J Cohen Steven F Maier Walter L Ness Hitoshi Okuda Robert A Schwartz David K Whitcomb |
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| Institution: | Graduate School of Business Administration, Duke University, Durham, NC 27706, U.S.A.;Graduate School of Business Administration, Duke University, Durham, NC 27706, U.S.A.;Brazilian Capital Markets Institute (IBMEC), Rio de Janeiro, Brazil;Management Science Group, Nomura Research Institute, Tokyo, Japan;Graduate School of Business Administration, New York University, New York, NY 10006, U.S.A.;Graduate School of Business Administration, Rutgers University, New Brunswick, NJ 07102, U.S.A. |
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| Abstract: | This paper is divided into two distinct parts. Part I, Empirical Evidence, tests a previously formulated variance, thinness relationship for security returns. First quarter 1972 daily returns variance is regressed on market value of shares, share price, trading activity, sales variance, and institutional holdings for 178 firms selected by stratified random sampling from AMEX and NYSE (specialist exchanges), and from Tokyo and Rio de Janeiro (non-specialist exchanges). The principal finding is that returns variance and market value are inversely related on non-specialist exchanges, but not on specialist exchanges; this difference is attributed to specialists' impact. Part II, Policy Proposals, discusses the manner in which designated market makers may be effectively incorporated into a continuous auction exchange. Issues discussed include: desirability of price stabilization, transfers implicit in the existing U.S. specialist system, consolidation and public availability of the limit order book, number of designated market makers for a security, competitive bidding, and compensation for performing the price stabilization function. Stabilization is modeled as an external economy, and specific policy proposals for internalizing it are advanced. |
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