Third Market Broker-Dealers: Cost Competitors or Cream Skimmers?

Robert H Battalio

Journal of Finance, 1997, vol. 52, issue 1, 341-52

Abstract: This article compares the bid-ask spread for New York Stock Exchange-NYSE listed securities before and after a major third market broker-dealer, Bernard L. Madoff Investment Securities, begins to selectively purchase and execute orders in those securities. Tests reveal the quoted bid-ask spread tightens when Madoff enters the market. Furthermore, trading costs as measured by the difference between the transaction price and the midpoint of the contemporaneous bid-ask spread do not increase. Together, these results suggest that the adverse selection problem associated with allowing agents to selectively execute orders in exchange-listed securities may be economically insignificant. Copyright 1997 by American Finance Association.

Date: 1997
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