Price Experimentation and Security Market Structure
Review of Financial Studies
1993
We examine the role of market makers in facilitating price discovery. We show that a specialist may experiment with prices to induce more informative order flow. thereby expediting price discovery. Market makers in a multiple-dealer system, unlike a specialist system, do not have the incentives to perform such costly experiments because of free-rider problems. Consequently, the specialist system may provide open markets where competition fails but at the cost of wider bid-ask spreads. We analyze the effect of experimentation on the bid-ask spread and provide an exploratory analysis of intraday specialist data that is consistent with our price experimentation hypothesis.
- DOI
- 10.1093/rfs/6.2.375
- Volume
- 6 (2)
- Pages
- 375-404
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref