Making a Market with Spreads and Depths

Authors

  • Kee H. Chung,

    Corresponding authorSearch for more papers by this author
  • Xin Zhao

    Search for more papers by this author
    • *

       The authors are respectively from the State University of New York (SUNY) at Buffalo, and Penn State Erie. They wish to thank an anonymous referee, also Nazmiye Ascioglu, Pinaki Bose, Lynn Doran, Mingsheng Li, Thomas McInish, Ted Moore, Bill Smith and Robert Wood for valuable comments and helpful discussions. The authors are solely responsible for the contents of the paper. (Paper received December 2001, revised and accepted January 2003)


Kee H. Chung, The M&T Chair in Banking and Finance, School of Management, Department of Finance and Managerial Economics, State University of New York (SUNY) at Buffalo, Buffalo, NY 14260, USA.
e-mail: keechung@buffalo.edu

Abstract

Abstract:  In this paper we study the quote revision behavior of NASDAQ market makers by analyzing inter-temporal changes in their spread and depth quotes. Using individual dealer quote and trade data for a sample of 2,319 stocks, we find that NASDAQ dealers make more frequent revisions in depths than in spreads and the extent of liquidity management is greater for stocks of smaller companies, lower-priced stocks, and stocks with larger trade sizes and fewer number of transactions. We show that intraday variation in the number of quote revisions follows the U-shaped pattern, indicating that the extent of liquidity management is greater during the early and late hours of trading than during midday.

Ancillary