How Market Makers Affect Efficiency; Evidence Markets are Becoming Less Efficient
Capital Markets Review Vol. 18, Nos. 1 & 2, 53-72, October 2011
Kurt W. Rotthoff, Ph.D.
Department of Economics and Legal Studies
Stock exchanges around the world have integrated a hybrid trading system. This has added anonymity for traders, making it harder for market makers to match large continuous trades, leading to an increase in volatility and a decrease in informational efficiency. This occurs because less information is contained in the price of a stock at any given time. Using a relative difference-in-difference estimation I find that as the hybrid market was adopted market volatility increased (for both the NYSE and LSE) relative to an electronic market. Although the use of a hybrid market may increase transaction speed, it decreases informational efficiency.