Entry, Exit, Market Makers and the Bid-Ask Spread
Posted: 26 Jan 1995
Date Written: March 1994
This paper examines the determinants and effects of entry and exit of market makers on the National Market System. Entry is associated with an increase in trading volume, a temporary increase in volatility and a permanent decline in the bid-ask spread. Exit, on the other hand, is accompanied by a small decline in volume but a permanent increase in both volatility and the spread. The spread changes are related to entry/exit, even after controlling for changes in volume and volatility. These results suggest that inter- dealer competition is successful in driving down the spread.
JEL Classification: G10, L10
Suggested Citation: Suggested Citation