Market Maker Revenues and Stock Market Liquidity

40 Pages Posted: 10 Sep 2007

See all articles by Carole Comerton-Forde

Carole Comerton-Forde

UNSW Business School; Financial Research Network (FIRN)

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Charles M. Jones

Columbia Business School

Date Written: August 13, 2007


We use an 11-year panel of daily specialist revenues on individual NYSE stocks to explore the relationship between market-maker revenues and liquidity. If market makers suffer substantial trading losses, lenders may respond by increasing funding costs or reducing credit lines, and market makers should respond by reducing liquidity provision. The data indicate that when specialists in aggregate lose money on their inventories, market-wide effective spreads widen in the days or weeks that follow, even after controlling for stock returns, volatility, and volume. This suggests an important role for market-maker financial performance in explaining liquidity time-variation. Revenues at the specialist firm level explain liquidity changes in that firm's assigned stocks. Revenues at the individual stock level do not explain changes in individual stock liquidity, consistent with a financial constraints model with broadly diversified intermediaries. Aggregate specialist revenues are increasing in conditional return volatility, as is revenue volatility. Specialist margins (specialist revenue per dollar of trading volume) are essentially constant across stocks, implying limited scope for cross-subsidization.

Keywords: financing constraints, time-varying liquidity

JEL Classification: G14, G24, G31

Suggested Citation

Comerton-Forde, Carole and Hendershott, Terrence J. and Jones, Charles M., Market Maker Revenues and Stock Market Liquidity (August 13, 2007). Available at SSRN: or

Carole Comerton-Forde

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Charles M. Jones (Contact Author)

Columbia Business School ( email )

3022 Broadway
Uris Hall Rm 101
New York, NY 10027
United States
(212) 854-4109 (Phone)

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