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

Mark Klock

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. Copyright 2002 by the Eastern Finance Association.

Date: 2002
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