Executive Summary:
Recent allegations of trading abuses by New York Stock Exchange (NYSE) specialist firms have called into question the future role for a specialist with information privileges. Theoretical models, such as Glosten (1989), characterize the privileged specialist as an information monopolist who derives market power from superior access to order flow information. In this study, we address the following related question: Can a specialist with no information advantage, i.e., a non-monopolist, enhance market quality? Consistent with theoretical predictions, we find that the Paris Bourse’s non-monopolist specialist reduces temporal imbalances in order flow (Grossman and Miller (1988)) and increases the frequency with which markets clear (Garbade and Silber (1979)). Around the announcement of specialist introduction, stocks experience an average cumulative abnormal return of nearly five percent that is positively correlated with improvements in stock liquidity (Amihud and Mendelson (1986)). Overall, these results suggest that the specialist can improve the terms of trade even in the absence of any information advantage by merely maintaining a regular market presence.
Key Words: Specialist; Market maker; Market quality; Electronic limit order book |
