Competition and Market Structure of National Association of Securities Dealers Automated Quotations

18 Pages Posted: 25 Jan 2008

See all articles by Youngsoo Kim

Youngsoo Kim

University of Regina

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis

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Abstract

In this paper, we study the relation among market structure, trading costs, and competition in National Association of Securities Dealers Automated Quotations (NASDAQ). In particular, we address the following questions: Do NASDAQ dealers exercise market power and extract economic rents in setting bid-ask spread? How persistent is the market power of dominant dealers? Our estimate of the rent is approximately ยข8.76, or 0.54% of stock price. The half-life of the persistence of this rent is approximately 20 months for the entire sample, while the half-life of younger stocks tend to be shorter than those of more mature stocks. Our result supports Schultz: NASDAQ dealers make markets only for stocks where they have competitive advantages in accessing order flow and in information. It might take a while before a market maker poses effective competition to existing dominant market makers. In the meantime, incumbent market makers are able to exercise market power and appear to earn abnormally large profits.

Suggested Citation

Kim, Youngsoo and Mehrotra, Vikas, Competition and Market Structure of National Association of Securities Dealers Automated Quotations. International Review of Finance, Vol. 7, Issue 3-4, pp. 143-160, September/December 2007. Available at SSRN: https://ssrn.com/abstract=1086496 or http://dx.doi.org/10.1111/j.1468-2443.2007.00076.x

Youngsoo Kim (Contact Author)

University of Regina ( email )

3737 Wascana Parkway
Regina, Saskatchewan S4S OA2 S4S 0A1
Canada
(306) 585-5647 (Phone)

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis ( email )

School of Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2976 (Phone)
780-492-3325 (Fax)

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