Cold Case File? Inventory Risk and Information Sharing during the preâ€ 1997 NASDAQ
Laurence Daures Lescourret
European Financial Management, 2017, vol. 23, issue 4, 761-806
This paper shows that dealers in Overâ€ Theâ€ Counter (OTC) markets might choose to share information about transient price pressures. Using data from the preâ€ 1997 NASDAQ preopening, I find that the frequency and magnitude of nonâ€ positive spreads (the informationâ€ sharing vehicle) initiated by wholesalers (specialised marketâ€ makers with a high exposure to inventory risk) are strongly related to opening price reversals and daily trading imbalances. This activity is more likely to occur on days of large liquidity shocks, and it is not observed for other dealers. Overall, the obligation to absorb price pressure at a yet unknown opening price might induce dealers to communicate the direction in which the opening price should move. The findings contain lessons for the design of today's OTC markets.
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