Affirmative Obligations and Market Making with Inventory

31 Pages Posted: 22 Mar 2006

See all articles by Marios A. Panayides

Marios A. Panayides

University of Cyprus - Department of Accounting and Finance; University of Pittsburgh - Katz Graduate School of Business

Date Written: October 9, 2005

Abstract

Existing empirical studies provide little support for the theoretical prediction that market makers rebalance their inventory through revisions of quoted prices. In contrast, this study provides evidence that the specialist does engage in significant inventory rebalancing, but only when not constrained by the affirmative obligation to provide liquidity imposed by the NYSE's Price Continuity rule. The evidence also suggests that specialist affirmative obligations are associated with better market quality, but impose significant costs on the specialist. The specialist mitigates these costs through own-account trading when the rules are not binding. These findings bear on the current debate regarding market makers' behavior on the NYSE.

Keywords: Quoted Prices, Specialist, Limit Order Book, Price Continuity Rule

JEL Classification: G10, G14

Suggested Citation

Panayides, Marios A., Affirmative Obligations and Market Making with Inventory (October 9, 2005). Available at SSRN: https://ssrn.com/abstract=890803 or http://dx.doi.org/10.2139/ssrn.890803

Marios A. Panayides (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

University of Cyprus
P.O. Box 20537
Nicosia, CY-1678
Cyprus

University of Pittsburgh - Katz Graduate School of Business ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States

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