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Journal of Financial Intermediation Vol. 15 No. 1 2006

Does internalization diminish the impact of quote aggressiveness on dealer market share?

Kee H. Chung1; Chairat Chuwonganant2; D. Timothy McCormick3,4

1 University at Buffalo, State University of New York · 2 Indiana University – Purdue University Fort Wayne · 3 National Association of State Departments of Agriculture · 4 Nasdaq (United States)

Abstract

We analyze data provided by NASDAQ to examine how quote aggressiveness affects dealer market share and whether the practice of internalization mitigates the impact of quote aggressiveness. Our empirical results show that although internalization does not reduce the impact of price aggressiveness on dealer market share, it mitigates the impact of size aggressiveness. This result suggests that although internalization may not affect the dealer's incentive to post aggressive prices, it may reduce the incentive to post large depths. We find that aggressive quotes are more effective in raising dealer market share in stocks with a less competitive (more concentrated) market structure. Our results also show that the effective spread is wider (narrower) for stocks with a smaller price (size) elasticity of dealer market share.

DOI
10.1016/j.jfi.2004.10.002
Volume
15
Issue
1
Pages
108-131
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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