Does Internalization Diminish the Impact of Quote Aggressiveness on Dealer Market Share?

37 Pages Posted: 24 Aug 2004

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Chairat Chuwonganant

Indiana University Purdue University Fort Wayne

Tim McCormick

U.S. Securities and Exchange Commission

Date Written: July 2004

Abstract

We analyze data provided by NASDAQ to examine how quote aggressiveness affects dealer market share and whether the practice of internalization mitigates the impact of quote aggressiveness. Our empirical results show that although internalization does not reduce the impact of price aggressiveness on dealer market share, it mitigates the impact of size aggressiveness. This result suggests that although internalization may not affect the dealer's incentive to post aggressive prices, it may reduce the incentive to post large depths. We find that aggressive quotes are more effective in raising dealer market share in stocks with a less competitive (more concentrated) market structure. Our results also show that the effective spread is wider (narrower) for stocks with a smaller price (size) elasticity of dealer market share.

Keywords: Dealer market share, Market concentration, Herfindahl-index, Internalization, Quote aggressiveness, Decimalization

JEL Classification: G18, G19

Suggested Citation

Chung, Kee H. and Chuwonganant, Chairat and McCormick, Tim, Does Internalization Diminish the Impact of Quote Aggressiveness on Dealer Market Share? (July 2004). Available at SSRN: https://ssrn.com/abstract=579341 or http://dx.doi.org/10.2139/ssrn.579341

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Chairat Chuwonganant

Indiana University Purdue University Fort Wayne

2101 E Coliseum Boulevard East
Fort Wayne, IN 46805
United States

Tim McCormick

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
United States
202-551-6633 (Phone)