Local Market Makers, Liquidity and Market Quality

46 Pages Posted: 6 Mar 2008 Last revised: 15 Jun 2011

See all articles by Simi Kedia

Simi Kedia

Rutgers Business School

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2008

Abstract

We examine the role of geographically proximate (local) market makers in providing liquidity and improving the quality of a dealer market. Firms with active participation of local dealers enjoy lower quoted and effective spreads, as well as more informative prices. The beneficial effects from local market makers are not confined to a few “top” local dealers and they cannot be attributed to their participation in the firm's IPO syndicate or industry specialization. Further, we find that days with aggressive bidding from local market makers relative to their non-local counterparts are associated with significant positive abnormal returns, consistent with local market makers possessing information advantages. In summary, our results suggest that the information advantages of local market makers may be a contributing factor to the reduction in the cost of trading.

Keywords: Trading Costs, Liquidity, Geography, Information Advantages

JEL Classification: G14, G19, G24

Suggested Citation

Kedia, Simi and Zhou, Xing (Alex), Local Market Makers, Liquidity and Market Quality (January 18, 2008). Available at SSRN: https://ssrn.com/abstract=1102929 or http://dx.doi.org/10.2139/ssrn.1102929

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Xing (Alex) Zhou (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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