Competition and Market Structure of NASDAQ

30 Pages Posted: 8 Feb 2004

See all articles by Youngsoo Kim

Youngsoo Kim

University of Regina

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis

Date Written: September 2003

Abstract

In this paper, we study the relation among market structure, trading costs, and competition in NASDAQ. In particular, we address the following questions: Do NASDAQ dealers exercise market power and extract economic rents in setting bid-ask spread? How persistent is the market power of dominant dealers? Our estimate of the rent is approximately 8.76ยข, or 0.54% of stock price. The half-life of the persistence of this rent is approximately 20 months for the entire sample, while the half-life of younger stocks tend to be shorter than those of more mature stocks. Our result supports Schultz (2002): NASDAQ dealers make markets only for stocks where they have competitive advantages in accessing order flow and in information. It might take a while before a market maker poses effective competition to existing dominant market makers. In the meantime, incumbent market makers are able to exercise market power and appear to earn abnormally large profits.

Keywords: Market Structure, Competition, Nasdaq, Dealer, Bid-ask Spread

JEL Classification: G18, G24

Suggested Citation

Kim, Youngsoo and Mehrotra, Vikas, Competition and Market Structure of NASDAQ (September 2003). Available at SSRN: https://ssrn.com/abstract=486642 or http://dx.doi.org/10.2139/ssrn.486642

Youngsoo Kim (Contact Author)

University of Regina ( email )

3737 Wascana Parkway
Regina, Saskatchewan S4S OA2 S4S 0A1
Canada
(306) 585-5647 (Phone)

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis ( email )

School of Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2976 (Phone)
780-492-3325 (Fax)

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