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Rev Fin 1997; 10:871-901
© 1997 the Society for Financial Studies

Article

Entry, exit, market makers, and the bid-ask spread

S Wahal
Emory University, Atlanta, GA, USA

Abstract

The probability of entry and exit of dealers on the NASDAQ National Market (NNM) is significantly affected by trading intensity, volatility and the quoted bid-ask spread. Entry and exit of market makers is a pervasive phenomenon. Large-scale entry (exit) is associated with substantial declines (increases) in quoted end-of-day inside spreads, even after controlling for the effects of changes in volume and volatility. The spread changes are larger in magnitude for issues with few market makers; however, even for issues with a large number of market makers, substantial changes in quoted spreads take place. The results are consistent with the competitive model of dealer pricing.


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