Price Experimentation and Security Market Structure
- 1 April 1993
- journal article
- research article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 6 (2) , 375-404
- https://doi.org/10.1093/rfs/6.2.375
Abstract
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.Keywords
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