Geographic Proximity and Price Discovery: Evidence from Nasdaq
Journal of Financial Markets, vol. 14, no. 2, 193-226, 2011
54 Pages Posted: 27 Nov 2007 Last revised: 11 Dec 2011
Date Written: August 4, 2010
Abstract
We use the Nasdaq market making context to study the role of geographic proximity in the price discovery of a firm’s stock. We show that market makers closer to the firm's headquarters spend more time at the inside bid and ask quotes, initiate larger changes in the quotes, and account for greater information share when compared to non-local market makers. Examining a sample of relocating firms, we also find that market makers moving farther away from the firm after relocation experience a reduction in their contributions to price discovery. Our results suggest that some (local) market makers possess superior information relative to other (non-local) market makers and they trade strategically on this information, a finding that challenges the traditional assumptions in market microstructure theory.
Keywords: Price discovery, quote quality, geography, market microstructure
JEL Classification: G14, G19, G20, G24
Suggested Citation: Suggested Citation
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