Making a Market with Spreads and Depths

Chung, Kee H.; Zhao, Xin

doi:10.2139/ssrn.386401

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Making a Market with Spreads and Depths

34 Pages Posted: 9 Apr 2003

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Xin Zhao

Pennsylvania State University (Erie) - The Behrend College

Abstract

In this paper we study the quote revision behavior of NASDAQ market makers by analyzing inter-temporal changes in their spread and depth quotes. Using individual dealer quote and trade data for a sample of 2,319 stocks, we find that NASDAQ dealers make more frequent revisions in depths than in spreads and the extent of liquidity management is greater for stocks of smaller companies, lower-priced stocks, and stocks with larger trade sizes and fewer number of transactions. We show that intraday variation in the number of quote revisions follows the U-shaped pattern, indicating that the extent of liquidity management is greater during the early and late hours of trading than during midday.

JEL Classification: G14

Suggested Citation: Suggested Citation

Chung, Kee H. and Zhao, Xin Jessica, Making a Market with Spreads and Depths. Available at SSRN: https://ssrn.com/abstract=386401 or http://dx.doi.org/10.2139/ssrn.386401