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Are Market Makers Uninformed and Passive? Signing Trades in the Absence of Quotes

FRB of New York Staff Report No. 395

39 Pages Posted: 28 May 2009  

Michel van der Wel

Erasmus University Rotterdam; CREATES; ERIM; Tinbergen Institute

Albert J. Menkveld

VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Asani Sarkar

Federal Reserve Bank of New York

Date Written: September 1, 2009

Abstract

We develop a new likelihood-based approach to sign trades in the absence of quotes. It is equally efficient as existing MCMC methods, but more than 10 times faster. It can deal with the occurrence of multiple trades at the same time, and noisily observed trade times. We apply this method to a high-frequency dataset of the 30Y U.S. treasury futures to investigate the role of the market maker. Most theory characterizes him as an uninformed passive liquidity supplier. Our results suggest that some market makers actively demand liquidity for a substantial part of the day and are informed speculators.

Keywords: market makers, liquidity supply, signing trades, inventory, information, Treasury futures markets

JEL Classification: G10, G14, G12, G19

Suggested Citation

van der Wel, Michel and Menkveld, Albert J. and Sarkar, Asani, Are Market Makers Uninformed and Passive? Signing Trades in the Absence of Quotes (September 1, 2009). FRB of New York Staff Report No. 395. Available at SSRN: https://ssrn.com/abstract=1409931 or http://dx.doi.org/10.2139/ssrn.1409931

Michel Van der Wel (Contact Author)

Erasmus University Rotterdam ( email )

Burg. Oudlaan 50
Rotterdam, NL 3062 PA
Netherlands

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Albert J. Menkveld

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Asani Sarkar

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

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