Competition and Market Structure of National Association of Securities Dealers Automated Quotations

International Review of Finance, Vol. 7, Nos. 3 & 4, 2007

University of Alberta School of Business Research Paper No. 2013-219

Posted: 26 May 2013 Last revised: 30 May 2013

See all articles by Vikas Mehrotra

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis

Youngsoo Kim

University of Regina

Multiple version iconThere are 2 versions of this paper

Date Written: September 23, 2006

Abstract

In this paper, we study the relation among market structure, trading costs, and competition in National Association of Securities Dealers Automated Quotations (NASDAQ). In particular, we address the following questions: Do NASDAQ dealers exercise market power and extract economic rents in setting bid-ask spread? How persistent is the market power of dominant dealers? Our estimate of the rent is approximately b8.76, or 0.54% of stock price. The halflife of the persistence of this rent is approximately 20 months for the entire sample, while the half-life of younger stocks tend to be shorter than those of more mature stocks. Our result supports Schultz: NASDAQ dealers make markets only for stocks where they have competitive advantages in accessing order flow and in information. It might take a while before a market maker poses effective competition to existing dominant market makers. In the meantime, incumbent market makers are able to exercise market power and appear to earn abnormally large profits.

Suggested Citation

Mehrotra, Vikas and Kim, Youngsoo, Competition and Market Structure of National Association of Securities Dealers Automated Quotations (September 23, 2006). International Review of Finance, Vol. 7, Nos. 3 & 4, 2007 ; University of Alberta School of Business Research Paper No. 2013-219. Available at SSRN: https://ssrn.com/abstract=2269241

Vikas Mehrotra (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

School of Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2976 (Phone)
780-492-3325 (Fax)

Youngsoo Kim

University of Regina ( email )

3737 Wascana Parkway
Regina, Saskatchewan S4S OA2 S4S 0A1
Canada
(306) 585-5647 (Phone)

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