Time Variation in Liquidity: The Role of Market Maker Inventories and Revenues

59 Pages Posted: 31 Dec 2008

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

Pamela C. Moulton

Cornell University - SC Johnson College of Business

Mark S. Seasholes

ASU WP Carey School of Business

Date Written: December 31, 2008

Abstract

We show that market-maker balance sheet and income statement variables explain time variation in liquidity, suggesting liquidity-supplier financing constraints matter. Using 11 years of NYSE specialist inventory positions and trading revenues, we find that aggregate market level and specialist-firm level spreads widen when specialists have large positions or lose money. The effects are non-linear and most prominent when inventories are big or trading results have been particularly poor. These sensitivities are smaller after specialist firm mergers, consistent with deep pockets easing financing constraints. Finally, compared to low-volatility stocks, the liquidity of high-volatility stocks is more sensitive to inventories and losses.

Keywords: Liquidity, Market-Makers

Suggested Citation

Comerton-Forde, Carole and Hendershott, Terrence J. and Jones, Charles M. and Moulton, Pamela C. and Seasholes, Mark S., Time Variation in Liquidity: The Role of Market Maker Inventories and Revenues (December 31, 2008). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1321961

Carole Comerton-Forde

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

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

Columbia Business School ( email )

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

HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/cj88

Pamela C. Moulton

Cornell University - SC Johnson College of Business ( email )

Ithaca, NY 14853
United States

Mark S. Seasholes (Contact Author)

ASU WP Carey School of Business ( email )

Dept of Finance, BAC 501
400 E. Lemon St.
Tempe, AZ 85287-3906
United States

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