Geographic proximity and price discovery: Evidence from NASDAQ

    Authors

    A. Anand; V. A. Gatchev; L. Madureira; C. A. Pirinsky;S. Underwood

    Comments

    Authors: contact us about adding a copy of your work at STARS@ucf.edu

    Abbreviated Journal Title

    J. Financ. Mark.

    Keywords

    Price discovery; Quote quality; Geographic location; Market; microstructure; INITIAL PUBLIC OFFERINGS; FOREIGN-EXCHANGE MARKET; SELL-SIDE RESEARCH; INFORMED TRADERS; STOCK; INFORMATION; REPUTATION; MAKER; MICROSTRUCTURE; HEADQUARTERS; Business, Finance

    Abstract

    We use the NASDAQ market making context to study the role of geographic proximity in the price discovery of a firm's stock. We show that market makers closer to the firm's headquarters spend more time at the inside bid and ask quotes, initiate larger changes in the quotes, and account for greater information share when compared to non-local market makers. Examining a sample of relocating firms, we also find that market makers moving farther away from the firm after relocation experience a reduction in their contributions to price discovery. Our results suggest that some (local) market makers possess superior information relative to other (non-local) market makers and they trade strategically on this information, a finding that challenges the traditional assumptions in market microstructure theory. (C) 2010 Elsevier B.V. All rights reserved.

    Journal Title

    Journal of Financial Markets

    Volume

    14

    Issue/Number

    2

    Publication Date

    1-1-2011

    Document Type

    Article

    Language

    English

    First Page

    193

    Last Page

    226

    WOS Identifier

    WOS:000286356100001

    ISSN

    1386-4181

    Share

    COinS