The Effect of Market Structure on the Incentives to Quote Aggressively: An Empirical Study of Nasdaq Market Makers

Mark Klock and D. Timothy McCormick

The Financial Review, 2002, vol. 37, issue 3, 403-419

Abstract: We use data on Nasdaq stocks to study arguments that preferencing reduces incentives to quote competitively. We examine a market maker’s volume as a function of various measures of quoting aggressiveness. We find that more aggressive quoting does indeed result in more business. We also examine the relation between volume and quote aggressiveness as a function of the competitiveness. We find that in less (more) competitive markets, increased quote aggressiveness has a smaller (larger) impact on market share. We argue that preferencing arrangements could be more harmful to public investors in markets where competition is weak.

Date: 2002
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