Abstract
In most financial markets, dealers are given trading advantages meant to encourage liquidity provision. However, it is unclear if these advantages truly induce liquidity provision. We test a unique dataset containing weekly trades and transaction prices of all dealers from the Taiwan Stock Exchange. Standard market-making models, such as Grossman and Miller (1988) and Kyle (1985), imply that market maker trades and contemporaneous returns should be negatively correlated. We find a strong positive correlation in aggregate, implying that these dealers do not provide liquidity. Dealers are more likely to provide liquidity for small-cap stocks, and smaller dealers are more likely than large dealers to provide liquidity. After decomposing profits into information and market-making components, we find profit results consistent with liquidity provision only for small capitalization stocks.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
