Determinants of Price Quote Revisions on the London Stock Exchange

Andy Snell and Ian Tonks

Economic Journal, 1995, vol. 105, issue 428, 77-94

Abstract: This paper investigates the determinants of price quote revisions on the London Stock Exchange for a sample of highly liquid stocks over a two-week settlement period in September 1990. In our theoretical model the level of optimal price quotes set by market makers are a function of the expected fundamental price, the expected number of liquidity trades and the lagged level of inventories. The model is used to test for the existence of adverse selection, inventory control and anticipated liquidity trade effects on quote revisions. Our findings are that while there seems to be some evidence of asymmetric information in our sample, market makers clearly take into account their inventory positions in the stocks in which they make a market, but there is little evidence that market makers exploit liquidity traders. Copyright 1995 by Royal Economic Society.

Date: 1995
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