Liquidity Provision and the Organizational Form of NYSE Specialist Firms


  • Jay F. Coughenour,

  • Daniel N. Deli

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    • Jay Coughenour is from the University of Delaware; Dan Deli is from Arizona State University. We thank several people from the specialist community including Thomas Joyce and J.R. May from Merrill Lynch, Charles J. Bocklet, III and Maureen Seaquist from Bocklet & Co., and representatives from Benjamin Jacobson & Sons, Lyden, Dolan, Nick & Company, JJC Specialist Corporation, and Spear, Leeds, and Kellogg for providing useful information. We thank Steven Wheeler, the NYSE Archivist, for providing essential guidance through NYSE documents. We thank Jeff Bacidore, Hank Bessembinder, William Christie, Mason Gerety, Richard Green (the editor), Kathy Kahle, Michele LaPlante, Ken Lehn, Harold Mulherin, Paul Seguin, an anonymous referee, and seminar participants at the 2000 JFI Symposium at Boston College, the 2000 WFA Conference, the SEC, Boston University, Northeastern University, and the University of Delaware for valuable comments. The views expressed herein do not necessarily reflect those of the NYSE or the firms named above. All errors, omissions, and conclusions are the responsibility of the authors.


We examine the influence of NYSE specialist firm organizational form on the nature of liquidity provision. We compare closely held firms whose specialists provide liquidity with their own capital to widely held firms whose specialists provide liquidity with diffusely owned capital. We argue that specialists using their own capital have a greater incentive and ability to reduce adverse selection costs, but face a greater cost of capital. Differences in the proportion of spreads due to adverse selection costs, large trade frequency, the sensitivity between depth and spreads, and price stabilization support this argument.