An Analysis of Market Makers' Behavior on NASDAQ Europe

25 Pages Posted: 3 Feb 2003

See all articles by Rudy De Winne

Rudy De Winne

UCLouvain

Isabelle Platten

Facultes Un. Notre-Dame de la Paix Namur (FUNDP), CEREFIM

Date Written: January 8, 2003

Abstract

The paper empirically investigates market makers' behavior on Nasdaq Europe. The impact of market makers' competition and some other microstructure effects on spreads are analyzed. We perform a decomposition of the spread into its components in both Huang & Stoll (1997) and Lin, Sanger & booth (1995) settings. The main finding is the small adverse selection component on this rather thin market, together with a high serial correlation in the order flow. Although the spread decomposition does not succeed in identifying inventory costs, we show that market makers manage their inventories effectively. However, reversion to a desired inventory level appears to be slow, compared to what has been documented on more active markets.

Keywords: Market Microstructure, Spread Components, Stock Inventory Management, Nasdaq Europe

JEL Classification: G14, G10

Suggested Citation

De Winne, Rudy and Platten, Isabelle, An Analysis of Market Makers' Behavior on NASDAQ Europe (January 8, 2003). Available at SSRN: https://ssrn.com/abstract=367463 or http://dx.doi.org/10.2139/ssrn.367463

Rudy De Winne (Contact Author)

UCLouvain ( email )

Chaussée de Binche, 151
Mons, 7000
Belgium
+3265323334 (Phone)

Isabelle Platten

Facultes Un. Notre-Dame de la Paix Namur (FUNDP), CEREFIM ( email )

Rempart de la Vierge 8
Namur B-5000
Belgium

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