Market Making and Trading in NASDAQ Stocks

Posted: 26 Dec 1998

See all articles by Edward Nelling

Edward Nelling

Drexel University - Department of Finance

Michael A. Goldstein

Babson College - Finance Division

Abstract

This paper examines the relations between the number of market makers, trading activity, and price improvement in Nasdaq stocks, using a model motivated by Grossman and Miller (1988). Results indicate a positive relation between the number of market makers and trading frequency, and that competition among market makers reduces effective bid-ask spreads.

Results estimated using a simultaneous equations framework support the model predictions of Grossman and Miller. Results also indicate that trading frequency may be more important than trade size in determining the number of market makers.

JEL Classification: G12, G14

Suggested Citation

Nelling, Edward F. and Goldstein, Michael A., Market Making and Trading in NASDAQ Stocks. Financial Review, February 1999. Available at SSRN: https://ssrn.com/abstract=142152

Edward F. Nelling (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215.895.2117 (Phone)
215.895.2955 (Fax)

Michael A. Goldstein

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

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