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Participation Strategy of the NYSE Specialists to the Trades

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  • Bülent, Köksal

Abstract

Using 2001 NYSE system order data in the decimal pricing environment, we analyze how the specialists react to the changes in market variables while making participation decisions to the trades. We analyze the following options that are available to the specialist before he trades: don’t participate; participate at the quoted price; participate and improve the price. We find that the specialist uses information in the limit order book as summarized by the limit order book asymmetry. The specialist increases the probability that he participates to the trade when a market order arrives if he is able to step in front of the heavy side of the LOB. If the relative size of the market order, as described by the ratio of the market order size to the posted depth at the relevant side of the market, is high, the specialist chooses not to participate and let the market order trade with the limit order book. Consistent with the theoretical results in the previous literature, specialists trade more aggressively when the spread is large. We find that specialist trading strategies in stocks from different volume and price categories vary substantially. Finally, we also find significant inventory effects. The specialist trades more aggressively, if the trade with the incoming market order restores his inventory.

Suggested Citation

  • Bülent, Köksal, 2008. "Participation Strategy of the NYSE Specialists to the Trades," MPRA Paper 30512, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:30512
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    References listed on IDEAS

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    Cited by:

    1. Bülent Köksal, 2010. "Differences in individual NYSE specialists' performances and strategies," Review of Financial Economics, John Wiley & Sons, vol. 19(1), pages 8-18, January.

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    More about this item

    Keywords

    NYSE specialists; Dealer Trading; Market Makers; Limit Order Book;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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