The Role of Trading Halts in Monitoring a Specialist Market

Rodney L. White Center for Financial Research, Working Paper No. 30-99

48 Pages Posted: 8 Mar 2001

See all articles by Roger M. Edelen

Roger M. Edelen

Virginia Tech

Simon Gervais

Duke University - Fuqua School of Business; Duke Innovation & Entrepreneurship Initiative

Date Written: February 8, 2001

Abstract

We model an exchange as a collection of specialists, each a monopolist market maker in a subset of the stocks listed on the exchange. Specialists can obtain net private benefits at the expense of the exchange (the collection of all specialists) by quoting a privately optimal pricing schedule. Conversely, a coordinated pricing schedule makes all specialists and customers better off. However, coordination requires a system of monitoring and punishment, which can break down when information asymmetries between the exchange and a specialist are high. This breakdown can cause the specialist to seek a temporary halt to trading to alleviate unjustified punishment, or the exchange to halt trading to prevent the quoting of damaging privately optimal pricing schedules. We use a sample of NYSE halts and a proxy for the exchange-specialist information asymmetry to test this theory. As predicted, we find a significant increase in estimated information asymmetry immediately preceding trading halts.

Keywords: Agency theory, market microstructure, trading costs, exchange organization

JEL Classification: G10

Suggested Citation

Edelen, Roger M. and Gervais, Simon, The Role of Trading Halts in Monitoring a Specialist Market (February 8, 2001). Rodney L. White Center for Financial Research, Working Paper No. 30-99, Available at SSRN: https://ssrn.com/abstract=262280 or http://dx.doi.org/10.2139/ssrn.262280

Roger M. Edelen (Contact Author)

Virginia Tech ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Simon Gervais

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7683 (Phone)
919-883-5078 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty_research/faculty_directory/gervais/

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
223
Abstract Views
1,586
rank
190,955
PlumX Metrics