An Empirical Analysis of Quoted Depths of NYSE and Amex Stocks

Charlie Charoenwong and Kee H Chung

Review of Quantitative Finance and Accounting, 2000, vol. 14, issue 1, 85-102

Abstract: In this study, we find strong intertemporal/cross-sectional correlations between quoted depths and various security characteristics for a sample of stocks listed on the NYSE and Amex. Our empirical results indicate that although specialists are generally unable to discern insider trading as it occurs, they cope with insider trading by posting smaller depths for stocks with a greater tendency of insider trading. Empirical evidence also indicates that specialists/limit order traders quote smaller depths for riskier stocks to limit potential losses to better-informed traders. In addition, we find that specialists/limit order traders quote larger depths for stocks with greater trading volume, larger market capitalization, and higher competition. Overall, our findings suggest that depths are an important means through which specialists and limit order traders deal with the adverse selection problem, order processing problem, and competition. Copyright 2000 by Kluwer Academic Publishers

Date: 2000
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