Title

Geographic proximity and price discovery: Evidence from NASDAQ

Authors

Authors

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

Comments

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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

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