Market Making and Trading in Nasdaq Stocks |
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Authors: | Michael A. Goldstein Edward F. Nelling |
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Affiliation: | The University of Colorado at Boulder, and International and Research Division New York Stock Exchange;Georgia Institute of Technology |
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Abstract: | This paper examines the relations between the number of market makers, trading activity, and price improvement in Nasdaq stocks, using a model motivated by Grossman and Miller (1988). Results indicate a positive relation between the number of market makers and trading frequency, and that competition among market makers reduces effective bid-ask spreads. Results estimated using a simultaneous equations framework support the model predictions of Grossman and Miller. Results also indicate that trading frequency may be more important than trade size in determining the number of market makers. |
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Keywords: | market making price improvement microstructure endogeneity |
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