Market maker competition and price efficiency: Evidence from China |
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| Affiliation: | 1. School of Finance, Southwestern University of Finance and Economics, Chengdu, China;2. Western Kentucky University, Bowling Green, KY, USA;1. School of Economics, The Peking University, China;2. School of Management, Wuhan University of Technology, China;3. Economics and Management School of Wuhan University, China;1. School of Business, Jiangnan University, Wuxi, Jiangsu 214122, China;2. F.C. Manning School of Business Administration, Acadia University, Wolfville, NS B4P 2R6, Canada;3. College of Management & Economics, Tianjin University, Tianjin 300072, China;4. Odette School of Business, University of Windsor, Windsor, Ontario N9B 3P4, Canada |
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| Abstract: | We test the relationship between market maker competition and stock price efficiency. Using the number of market makers as a proxy for competition, the results show a strong positive correlation between competition and stock price efficiency. Moreover, price efficiency is higher when competing market makers have higher research ability. We suggest that market maker competition increases price efficiency through two channels: 1) Competition decreases transaction costs, and 2) Uninformed market makers learn from orders submitted by informed market makers through competition. The latter happens only in the group of market makers with higher experiences. The results imply that the price efficiency can be improved by enhancing the competition of market makers with high research ability and experiences. |
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| Keywords: | Market maker Competition Price efficiency Transaction costs Learning |
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