Market Making with Costly Monitoring: An Analysis of the SOES Controversy

Thierry Foucault, Ailsa Röell and Patrik Sandås

Review of Financial Studies, 2003, vol. 16, issue 2, pages 345-384

Abstract: This article presents a model of information monitoring and market making in a dealership market. We model how intensively dealers monitor public information to avoid being picked off by professional day traders when monitoring is costly. Price competition among dealers is hampered by their incentives to share monitoring costs. The risk of being picked off by the day traders makes dealers more competitive. The interaction between these effects determines whether a firm quote rule improves trading costs and price discovery. Our empirical results support the prediction that professional day traders prefer stocks with small spreads, but offer less support for the prediction that their trading leads to wider spreads. Copyright 2003, Oxford University Press.

Date: 2003
View citations in EconPapers

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhg005 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Market Making with Costly Monitoring: An Analysis of the SOES Controversy (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:oup:rfinst:v:16:y:2003:i:2:p:345-384

Ordering information: This journal article can be ordered from
http://www4.oup.co.uk/revfin/subinfo/

Access Statistics for this article

Review of Financial Studies is edited by Maureen O'Hara

More articles in Review of Financial Studies from Oxford University Press for Society for Financial Studies
Address: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().