Market Making with Costly Monitoring: An Analysis of the SOES Controversy
This article presents a model of information monitoring and market making in a dealership market. We model how intensively dealers monitor public information to avoid being picked off by professional day traders when monitoring is costly. Price competition among dealers is hampered by their incentiv...
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| Veröffentlicht in: | The Review of financial studies 2003-07, Vol.16 (2), p.345-384 |
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| container_end_page | 384 |
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| container_issue | 2 |
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| container_title | The Review of financial studies |
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| creator | Foucault, Thierry Röell, Ailsa Sandås, Patrik |
| description | This article presents a model of information monitoring and market making in a dealership market. We model how intensively dealers monitor public information to avoid being picked off by professional day traders when monitoring is costly. Price competition among dealers is hampered by their incentives to share monitoring costs. The risk of being picked off by the day traders makes dealers more competitive. The interaction between these effects determines whether a firm quote rule improves trading costs and price discovery. Our empirical results support the prediction that professional day traders prefer stocks with small spreads, but offer less support for the prediction that their trading leads to wider spreads. |
| doi_str_mv | 10.1093/rfs/hhg005 |
| format | Article |
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| ispartof | The Review of financial studies, 2003-07, Vol.16 (2), p.345-384 |
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| language | eng |
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| source | Business Source Complete; Jstor Complete Legacy; Oxford University Press Journals All Titles (1996-Current) |
| subjects | Business administration Business orders Coefficients Competition domain_shs.gestion.fin Finance Humanities and Social Sciences Information Liquidity Market Market capitalization Monitoring Monitoring costs Nasdaq Composite Index Nash equilibrium P values Prices Stocks Trade Traders Zero profit condition |
| title | Market Making with Costly Monitoring: An Analysis of the SOES Controversy |
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