Geographic Proximity and Price Discovery: Evidence from Nasdaq

Journal of Financial Markets, vol. 14, no. 2, 193-226, 2011

54 Pages Posted: 27 Nov 2007 Last revised: 11 Dec 2011

See all articles by Amber Anand

Amber Anand

Syracuse University - Whitman School of Management

Vladimir A. Gatchev

University of Central Florida - Department of Finance

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management

Christo A. Pirinsky

University of Central Florida

Shane Underwood

Baylor University

Date Written: August 4, 2010

Abstract

We use the Nasdaq market making context to study the role of geographic proximity in the price discovery of a firm’s stock. We show that market makers closer to the firm's headquarters spend more time at the inside bid and ask quotes, initiate larger changes in the quotes, and account for greater information share when compared to non-local market makers. Examining a sample of relocating firms, we also find that market makers moving farther away from the firm after relocation experience a reduction in their contributions to price discovery. Our results suggest that some (local) market makers possess superior information relative to other (non-local) market makers and they trade strategically on this information, a finding that challenges the traditional assumptions in market microstructure theory.

Keywords: Price discovery, quote quality, geography, market microstructure

JEL Classification: G14, G19, G20, G24

Suggested Citation

Anand, Amber and Gatchev, Vladimir A. and Madureira, Leonardo and Pirinsky, Christo Angelov and Underwood, Shane, Geographic Proximity and Price Discovery: Evidence from Nasdaq (August 4, 2010). Journal of Financial Markets, vol. 14, no. 2, 193-226, 2011, Available at SSRN: https://ssrn.com/abstract=1032633

Amber Anand

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244
United States

Vladimir A. Gatchev

University of Central Florida - Department of Finance ( email )

Orlando, FL 32816-1400
United States
(407) 823-3694 (Phone)
(407) 823-6676 (Fax)

HOME PAGE: http://www.bus.ucf.edu/vgatchev/

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States
216-368-5003 (Phone)

HOME PAGE: http://faculty.weatherhead.case.edu/madureira/

Christo Angelov Pirinsky

University of Central Florida ( email )

College of Business Administration/Finance
PO Box 161400
Orlando, FL FL 32816
United States
407-823-5962 (Phone)

Shane Underwood (Contact Author)

Baylor University ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4524 (Phone)

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