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

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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

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

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Xin Jessica Zhao

Pennsylvania State University (Erie) - The Behrend College ( email )

286 Burke
Erie, PA 16563-1400
United States

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