Uncertain Market Making
48 Pages Posted: 1 Oct 2015 Last revised: 3 May 2017
Date Written: May 2, 2017
This paper argues that market makers' presence is uncertain over any short time interval, as their operations are subject to constraints of, e.g., capital, technology, and attention. Such uncertain market making implies a random pricing equilibrium with new implications on market quality. A structural model captures the predicted price dispersion in the U.S. equity trading. In 2014, the estimated short-run dispersion is around 10 times of the long-run price impact, compared to only 2 times in the early 2000s. The theory and the structural model of uncertain market making contribute to the understanding of price dynamics.
Keywords: market making, price dispersion, liquidity, price efficiency
JEL Classification: G10, D40
Suggested Citation: Suggested Citation