Local Market Makers, Liquidity and Market Quality

40 Pages Posted: 25 Mar 2008 Last revised: 13 Jun 2011

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: October 1, 2007

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 cannot be attributed to their participation in the firm's IPO syndicate or industry specialization, and this local effect is mostly evidenced in firms with information problems such as small firms, non-urban firms and firms with high PIN values. 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: Geography, Information advantages, Liquidity, Market Quality, Trading Costs

JEL Classification: G14, G19, G24

Suggested Citation

Kedia, Simi and Zhou, Xing (Alex), Local Market Makers, Liquidity and Market Quality (October 1, 2007). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1108250

Simi Kedia (Contact Author)

Rutgers Business School ( email )

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

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System ( email )

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

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