Entry, Exit, Market Makers and the Bid-Ask Spread
REVIEW OF FINANCIAL STUDIES, Vol. 10 No. 3
Posted: 2 Jul 1997
The probability of entry/exit of dealers on the NASDAQ National Market (NNM) is significantly affected by trading intensity, volatility and the quoted bid-ask spread. Entry and exit of market makers is a pervasive phenomenon. Large scale entry (exit) is associated with substantial declines (increases) in quoted end-of-day inside spreads, even after controlling for the effects of changes in volume and volatility. The spread changes are larger in magnitude for issues with few market makers; however, even for issues with a large number of market makers, substantial changes in quoted spreads take place. The results are consistent with the competitive model of dealer pricing.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation