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Market Maker Quotation Behavior and Pretrade Transparency

Authors

  • Yusif Simaan,

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    • Simaan is at Fordham University, Weaver is at Baruch College, and Whitcomb is at Automated Trading Desk, Inc. and Rutgers University. The authors thank Robert Battalio, Archisman Chakraborty, Bill Christie, Dean Furbush, Ananth Madhavan, Dave Porter, Paul Schultz, Eric Sirri, and participants at the 1999 Western Finance Association, the 1999 Notre Dame Conference on Securities Markets, the 1999 JFI Symposium, the 1999 Accounting and Finance in Tel Aviv Conference, and the Aarhus School of Business, as well as the anonymous referee, for comments and suggestions on previous versions of this paper. Simaan's research was supported by a grant from the Electronic Traders Association (ETA). The data used were supplied by and Whitcomb's research was supported by Automated Trading Desk, Inc. (ATD), of which he is Founder and Chairman. ETA is an association of about 40 order entry firms and others interested in trading via computer, and ATD provides software and services for automated and computer-assisted limit order trading and operates a brokerage subsidiary. The views expressed in this paper are those of the authors and not necessarily those of the funding organizations
  • Daniel G. Weaver,

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    • Simaan is at Fordham University, Weaver is at Baruch College, and Whitcomb is at Automated Trading Desk, Inc. and Rutgers University. The authors thank Robert Battalio, Archisman Chakraborty, Bill Christie, Dean Furbush, Ananth Madhavan, Dave Porter, Paul Schultz, Eric Sirri, and participants at the 1999 Western Finance Association, the 1999 Notre Dame Conference on Securities Markets, the 1999 JFI Symposium, the 1999 Accounting and Finance in Tel Aviv Conference, and the Aarhus School of Business, as well as the anonymous referee, for comments and suggestions on previous versions of this paper. Simaan's research was supported by a grant from the Electronic Traders Association (ETA). The data used were supplied by and Whitcomb's research was supported by Automated Trading Desk, Inc. (ATD), of which he is Founder and Chairman. ETA is an association of about 40 order entry firms and others interested in trading via computer, and ATD provides software and services for automated and computer-assisted limit order trading and operates a brokerage subsidiary. The views expressed in this paper are those of the authors and not necessarily those of the funding organizations
  • David K. Whitcomb

    Search for more papers by this author
    • Simaan is at Fordham University, Weaver is at Baruch College, and Whitcomb is at Automated Trading Desk, Inc. and Rutgers University. The authors thank Robert Battalio, Archisman Chakraborty, Bill Christie, Dean Furbush, Ananth Madhavan, Dave Porter, Paul Schultz, Eric Sirri, and participants at the 1999 Western Finance Association, the 1999 Notre Dame Conference on Securities Markets, the 1999 JFI Symposium, the 1999 Accounting and Finance in Tel Aviv Conference, and the Aarhus School of Business, as well as the anonymous referee, for comments and suggestions on previous versions of this paper. Simaan's research was supported by a grant from the Electronic Traders Association (ETA). The data used were supplied by and Whitcomb's research was supported by Automated Trading Desk, Inc. (ATD), of which he is Founder and Chairman. ETA is an association of about 40 order entry firms and others interested in trading via computer, and ATD provides software and services for automated and computer-assisted limit order trading and operates a brokerage subsidiary. The views expressed in this paper are those of the authors and not necessarily those of the funding organizations

Abstract

We examine the impact of differing levels of pretrade transparency on the quotation behavior of Nasdaq market makers. We find that market makers are more likely to quote on odd ticks, and to actively narrow the spread, when they can do so anonymously by posting limit orders on Electronic Communication Networks (ECNs). From a public policy perspective, our findings suggest that making the level of pretrade transparency on Nasdaq more opaque by allowing anonymous quotes could improve price competition and narrow spreads further.

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