The Market for Market-Making

51 Pages Posted: 13 Jun 2000

See all articles by Paul H. Schultz

Paul H. Schultz

University of Notre Dame - Department of Finance

Date Written: February 2000

Abstract

Nasdaq market-makers can adopt new stocks or abandon old ones with almost no entry or exit costs. Under these circumstances, the theory of contestable markets predicts that market-making concentration in individual stocks should be unrelated to the profits dealers earn trading those stocks. However, I find that after adjusting for factors believed to determine spreads, market-maker concentration is a highly significant determinant of trading costs. The problem is that entry does not bring order flow. I show that dealers make markets in stocks in which they are likely to receive order flow either through purchase agreements or through internalization. A dealer's brokerage clientele, geographic location, and participation in underwriting syndicates are all determinants of his choice of stocks in which to make markets.

JEL Classification: G10, G24, L11, L13, L80

Suggested Citation

Schultz, Paul H., The Market for Market-Making (February 2000). Available at SSRN: https://ssrn.com/abstract=213528 or http://dx.doi.org/10.2139/ssrn.213528

Paul H. Schultz (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
219-631-3338 (Phone)
219-631-5255 (Fax)

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