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Market Makers and the Market Spread: A Review of Recent Literature

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  • Cohen, Kalman J.
  • Maier, Steven F.
  • Schwartz, Robert A.
  • Whitcomb, David K.

Abstract

Academic attention has increasingly been focused on the operation of security markets. This is largely due to the impetus provided by the Institutional Investor Study (see U.S. Securities and Exchange Commission [35]), by the Securities Act Amendments of 1975 whereby Congress mandated the development of a national market system (NMS), and by the expanding computer technology of the 1970s. Not surprisingly, much of the attention has focused on the role of dealers and stock exchange specialists as market makers. The literature has generally viewed these market makers as suppliers of immediacy to ordinary traders, and has taken the bid-ask spread to be the price they impose for the provision of this service.

Suggested Citation

  • Cohen, Kalman J. & Maier, Steven F. & Schwartz, Robert A. & Whitcomb, David K., 1979. "Market Makers and the Market Spread: A Review of Recent Literature," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(4), pages 813-835, November.
    • Handle: RePEc:cup:jfinqa:v:14:y:1979:i:04:p:813-835_00
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    1. repec:dau:papers:123456789/7390 is not listed on IDEAS
    2. Levin, Eric J. & Wright, Robert E., 1999. "Explaining the intra-day variation in the bid-ask spread in competitive dealership markets - A research note 1," Journal of Financial Markets, Elsevier, vol. 2(2), pages 179-191, May.
    3. Dhillon, Upinder S. & Ramirez, Gabriel G., 1995. "The impact of tax changes on trading of american depository receipts," Global Finance Journal, Elsevier, vol. 6(1), pages 65-77.
    4. Bruno Biais, 1990. "Formation des prix sur les marchés de contrepartie. Une synthèse de la littérature récente," Revue Économique, Programme National Persée, vol. 41(5), pages 755-788.
    5. Henk Berkman, 1990. "Intraday Patterns in the Quoted Spread on the Options Exchange and the Influence of the Limit-Orderbook," Revue Économique, Programme National Persée, vol. 41(5), pages 789-798.
    6. Olivier Gu'eant & Charles-Albert Lehalle & Joaquin Fernandez Tapia, 2011. "Dealing with the Inventory Risk. A solution to the market making problem," Papers 1105.3115, arXiv.org, revised Aug 2012.
    7. repec:zbw:bofrdp:1992_027 is not listed on IDEAS
    8. Suvanto, Antti, 1992. "Pricing decisions and the position constraint in foreign exchange dealing," Research Discussion Papers 27/1992, Bank of Finland.
    9. D'Hulst, R. & Rodgers, G.J., 2001. "Bid distributions of competing agents in simple models of auctions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 294(3), pages 447-464.
    10. Venkateswar, Sankaran, 1992. "Replacement cost disclosures, information asymmetry and market-maker behaviour: Assessment through the bid-ask spread," The British Accounting Review, Elsevier, vol. 24(2), pages 139-155.

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