Market-Making in the Third Market for Nyse-Listed Securities
35 Pages Posted: 20 Apr 1999
Date Written: March 22, 1999
This paper empirically examines market-making activity in the third market for common stocks that are listed on the NYSE, both those stocks subject to NYSE Rule 390 and those exempted from Rule 390 by SEC Rule 19c-3. Activity on both types of stocks is dominated by two dealers, Trimark Securities, Inc. and Bernard Madoff Investment Securities. Most non-NYSE members who make a market on Rule 390 stocks also make a market on Rule 19c-3 stocks, but bid-ask spreads on Rule 19c-3 stocks are wider than those posted by the same dealers on Rule 390 stocks. NYSE members account for an extremely small percent of market-making in the third market for Rule 19c-3 stocks and post quotes that are wider than those posted by dealers who are not members of the NYSE. This suggests that NYSE members do not compete with non-NYSE members on the basis of spread but use alternative methods, such as price matching and the internalization of orders, to attract order flow to the third market.
JEL Classification: G19, G18
Suggested Citation: Suggested Citation