Abstract
ABSTRACT This paper provides an analysis of the nature and evolution of a dealer market for Nasdaq stocks. Despite size differences in sample stocks, there is a surprising consistency to their trading. One dealer tends to dominate trading in a stock. Markets are concentrated and spreads are increasing in the volume and market share of the dominant dealer. Entry and exit are ubiquitous. Exiting dealers are those with very low profits and trading volume. Entering market makers fail to capture a meaningful share of trading or profits. Thus, free entry does little to improve the competitive nature of the market as entering dealers have little impact. We find, however, that for small stocks, the Nasdaq dealer market is being more competitive than the specialist market.
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References
1996Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE1994Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?2000When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket2000Stabilization Activities by Underwriters after Initial Public Offerings1994Why Did NASDAQ Market Makers Stop Avoiding Odd‐Eighth Quotes?1998An empirical analysis of NYSE specialist trading1We thank Jim Cochrane, Joel Hasbrouck, Don Keim, Kim Shapiro, Jerry Warner, and an anonymous referee for their helpful comments. Seminar participants at the Ohio State Conference on `Dealer Markets', London School of Economics, University of Pennsylvania, and University of Wisconsion provided many helpful suggestions. Minder Cheng, Nicole Parent, and Ed Steffelin provided excellent research support. This research was completed while Madhavan was visiting the New York Stock Exchange. The comments and opinions contained in this paper are those of the authors and do not necessarily reflect those of the directors, members or officers of the New York Stock Exchange, Inc.11994Aftermarket support and underpricing of initial public offerings1997Competition and Collusion in Dealer Markets