How Market Makers Affect Efficiency; Evidence Markets are Becoming Less Efficient
Kurt W. Rotthoff
Seton Hall University - W. Paul Stillman School of Business
August 18, 2011
Capital Markets Review, Vol. 18, Nos. 1&2, 53-72
Stock exchanges around the world have integrated a hybrid trading system. This has added anonymity for traders, making it harder for market makers to match large continuous trades, leading to an increase in volatility and a decrease in informational efficiency. This occurs because less information is contained in the price of a stock at any given time. Using a relative difference-in-difference estimation I find that as the hybrid market was adopted market volatility increased (for both the NYSE and LSE) relative to an electronic market. Although the use of a hybrid market may increase transaction speed, it decreases informational efficiency.
Number of Pages in PDF File: 31
Keywords: Market Efficiency, Hybrid Market, Information Efficiency, Speed Efficiency
JEL Classification: G12, G14, G15Accepted Paper Series
Date posted: November 10, 2008 ; Last revised: June 26, 2012
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