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The Trades of Market Makers: An Empirical Analysis of NYSE Specialists

Authors

  • JOEL HASBROUCK,

  • GEORGE SOFIANOS

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    • Hasbrouck is from the New York Stock Exchange and the Stern School of Business, New York University, and Sofianos is from the New York Stock Exchange. For comments on an earlier draft, we are indebted to René Stulz, the anonymous referee, David Chapman, Joseph Cherian, Eric Hughson, Ananth Madhavan, Eric Sirri, Seymour Smidt, Jim Shapiro, Deborah Sosebee, and seminar participants at the Board of Governors of the Federal Reserve System, Boston College, the Commodities Futures Trading Commission, Cornell University, the Federal Reserve Bank of New York, University of Texas at Austin, the Western Finance Association, and the European Finance Association. All errors are our own responsibility. The comments and opinions contained in this paper are those of the authors only. In particular, the views expressed here do not necessarily reflect those of the directors, members, or officers of the New York Stock Exchange, Inc.


ABSTRACT

This paper presents a transaction-level empirical analysis of the trading activities of New York Stock Exchange specialists. The main findings of the analysis are the following. Adjustment lags in inventories vary across stocks, and are in some cases as long as one or two months. Decomposition of specialist trading profits by trading horizon shows that the principal source of these profits is short term. An analysis of the dynamic relations among inventories, signed order flow, and quote changes suggests that trades in which the specialist participates have a higher immediate impact on the quotes than trades with no specialist participation.

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