Are market makers uninformed and passive? Signing trades in the absence of quotes

Michel van der Wel, Albert J. Menkveld and Asani Sarkar

No 395, Staff Reports from Federal Reserve Bank of New York

Abstract: We develop a new likelihood-based approach to signing trades in the absence of quotes. This approach is equally efficient as the existing Markov-chain Monte Carlo methods, but more than ten times faster. It can address the occurrence of multiple trades at the same time and allows for analysis of settings in which trade times are observed with noise. We apply this method to a high-frequency data set of thirty-year U.S. Treasury futures to investigate the role of the market maker. Most theory characterizes the market maker as an uninformed, passive supplier of liquidity. Our findings suggest, however, that some market makers actively demand liquidity for a substantial part of the day and that they are informed speculators

Keywords: Electronic trading of securities; Liquidity (Economics); Speculation; Futures (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-mst
Date: 2009

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