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Market Maker Performance: The Search for Fair Weather Market Makers

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Abstract

The London Stock Exchange has long been concerned that some market makers do not fulfill their obligations. This study describes a range of measures to identify such fair weather market makers. The results indicate that three firms of market makers meet the criteria for fair weather market making. It is also discovered that market makers in a given stock all quote the same fixed spread in round pennies and that this is about twice the touch. Internalized order flow is pervasive, with market makers receiving 57% of their order flow from associated brokers. However, fair weather market making is found to be distinct from order preferencing and internalization.

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Authors and Affiliations

  1. Financial Markets Group and Department of Accounting and Finance, London School of Economics and Political Science, U.K

    John L.G. Board

  2. Accounting and Finance Division, The School of Management, The University, Southampton, United Kingdom

    Charles M.S. Sutcliffe

  3. Markets and Trading Systems Division, Bank of England, Great Britain

    Anne F. Vila

Authors
  1. John L.G. Board
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  2. Charles M.S. Sutcliffe
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  3. Anne F. Vila
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Board, J.L., Sutcliffe, C.M. & Vila, A.F. Market Maker Performance: The Search for Fair Weather Market Makers. Journal of Financial Services Research 17, 259–276 (2000). https://doi.org/10.1023/A:1008102803467

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  • DOI: https://doi.org/10.1023/A:1008102803467

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