Encyclopedia of Finance Part 20 potx

The paper further considers the competitive environ-ment that market makers operate within, and con-cludes with the thought that institutionalization, the advent of electronic trading, d

MARKET MAKERS 1

ROBERT A SCHWARTZ, City University of New York, USA

LIN PENG, City University of New York, USA

Abstract

The primary focus of this entry is on market maker

services, revenues, and costs A market maker’s

basic function is to service the public’s demand to

trade with immediacy by continuously standing

ready to buy shares from customers who wish to

sell, and to sell shares to customers who wish to

buy Additionally, the market maker helps to

stabil-ize prices and to facilitate a reasonably accurate

price discovery Further, a special type of market

maker – a stock exchange specialist – fulfills the

role of an auctioneer The bid–ask spread is the

classic source of market maker profits, while the

costs of market maker operations include:

order-processing, risk-bearing (the cost of carrying an

unbalanced portfolio), and adverse selection (the

cost of trading with a better-informed participant)

The paper further considers the competitive

environ-ment that market makers operate within, and

con-cludes with the thought that institutionalization,

the advent of electronic trading, deregulation, and

globalization of the equity markets have led to

major changes in market maker operations in the

recent past, and will continue to do so in the coming

years

Keywords: adverse selection; bid–ask spread;

competitive environment; electronic trading;

ex-change specialist; immediacy; market maker;

order-processing; price stabilization; price

discov-ery; risk-bearing

Market makers play a central role in many equity markets by buying and selling shares to service the public’s demand to trade immediately (the classic service provided by a dealer) Market makers are also responsible for stabilizing prices (making a market ‘‘fair and orderly’’) and facilitat-ing price determination Some market makers, such as stock exchange specialists, also perform the role of auctioneer

Demsetz (1968) was one of the first to analyze the supply of immediacy Buyers and sellers arrive sporadically at the market, and it is not a simple matter for them to find each other in time The market maker provides a solution by continuously standing ready to trade from his or her own inven-tory of shares The service is not free, however The dealer sells to buyers at higher ask prices, and buys from sellers at lower bid prices The bid–ask spread

is the market maker’s compensation (sometimes referred to as ‘‘the dealer’s turn’’)

Market makers are not necessary for immedi-acy to be provided to a market Public traders can post limit orders with commission brokers acting

as middlemen However, immediacy is not the only marketability service provided by a market maker

The liquidity provided by market makers also helps to stabilize prices Most participants in the securities markets prefer prices that, all else equal, are less volatile They care about this as investors because they are generally assumed to be risk-averse They care about this as traders because

they are averse to transaction price uncertainty.

Market maker intervention helps to stabilize price

fluctuations in the short run The U.S exchange

specialist in particular has an ‘‘affirmative

obliga-tion’’ to make a fair and orderly market

Market makers also facilitate the determination

of accurate prices First, their own quotes directly

set market prices Second, their quotes are signals

that public traders react to in writing their orders;

therefore, market makers indirectly affect market

prices by influencing the public order flow Third,

exchange specialists establish market-clearing

prices at the opening of the trading day and at

the resumption of trading after halts caused by

the advent of news

Price stabilization and price discovery are both

consistent with the provision of immediacy This is

because ‘‘immediacy’’ means not only the ability to

trade promptly, but also the ability to trade in

reasonable amounts at prices that properly reflect

current market conditions (Smidt, 1971

empha-sizes the supply of liquidity in depth, namely the

ability of investors to trade quickly and in size, at

the market maker’s quotes.) Consequently,

trans-actional immediacy, price stability and accurate

price discovery are all attributes of markets that

are ‘‘fair and orderly.’’

As auctioneers in an agency market, market

makers also organize and oversee trading Stock

exchange specialists do so by maintaining the limit

order books and by assuring that trading rules are

not violated On some exchanges (such as the

Tokyo Stock Exchange), market makers act only

in the clerical bookkeeping and regulatory

over-sight capacities, and are not allowed to trade the

stocks assigned to them

The bid–ask spread set by the market maker

reflects the following components:

order-process-ing costs, risk premium or inventory costs,

ad-verse selection costs, and profit (Stoll, 1989)

The order-processing costs compensate market

makers for their time and effort, cost of

paper-work, etc Risk bearing is central to the dealership

function (Amihud and Mendelson, 1980; Ho and

Stoll, 1981) The market maker trades to make a

market rather than for his or her own investment motives If buyers appear, a market maker must

be willing to assume a short position; if sellers arrive, the market maker must be willing to as-sume a long position As a result, the market maker generally acquires an unbalanced port-folio The market maker is then subject to uncer-tainty concerning the future price and the future transactions volume in the asset Not knowing when transactions will be made, the market maker does not know for how long an unbalanced inventory position will have to be maintained An unbalanced inventory position implies the exist-ence of diversifiable risk Thus, the market maker requires a risk premium on the inventory risk, which other investors can eliminate by proper portfolio diversification (the expected return on

a stock compensates all investors and market makers for accepting nondiversifiable risk) Market makers also protect themselves against adverse selection Public orders to purchase or to sell securities are motivated by either idiosyn-cratic liquidity reasons or informational change The market maker typically does not know whether an order has originated from an informed trader or from a liquidity trader If a public trader receives news and transmits the order before the market maker has learned of the informational change, the public trader profits at the market maker’s expense (Bagehot, 1971; Copeland and Galai, 1983; Glosten and Milgrom, 1985) The market maker responds to the cost of ignorance by increasing the ask quote and lowering the bid so that the expected loss to the informed traders is compensated by the expected gain from the liquidity traders The market maker cannot achieve total protection, however, by sufficiently widening the spread Regardless of how much the offer is raised and=or

or the bid is lowered, any informationally moti-vated trade would be at the market maker’s expense

And the defensive maneuver is not costless The market maker profits from liquidity trades, and in the process of widening the spread to guard against

informed traders, increases the cost of transacting

and so loses an increasing number of liquidity

traders Yet, there must be investors who trade

for noninformational reasons Without the

liquid-ity traders, the dealer market would collapse

(Grossman and Stiglitz, 1980)

The competitive environment of a market maker

firm differs depending on whether it operates in an

agency=auction environment or in a dealer market

In an agency=auction market, limit order traders

and floor traders provide competition for the

sin-gle market maker (stock exchange specialist) In

contrast, a dealer market is competitive only if

the order flow for a security is directed to more

than one dealer firm This competition for

market-ability services fragments the informational

con-tent of the order flow, however In other words,

each dealer firm knows what buy and sell orders it

receives, but does not observe the flow of orders to

competing dealer firms However, in a

screen-based system, each dealer firm does see the quotes

posted by others In addition, information is

trans-ferred by transaction price reporting and via

inter-dealer trading

The online reporting of large transactions,

how-ever, can signal information about a dealer’s

in-ventory position to its competitors And, when the

order flow is dominated by institutional investors,

as on the London Stock Exchange, other problems

can arise (see Neuberger and Schwartz, 1990)

These include fair-weather market making (taking

the privileges but failing to meet the obligations

of market making), preferencing (the diversion

of order flow to a market maker firm that is not

necessarily posting the best quotes, but that has

guaranteed best-price execution nonetheless),

handling a lumpy order flow (few trades but of

large size), and coping with one-way markets

(buyers only or sellers only) All told, market

mak-ing is a complex, multifaceted operation

Institutionalization, the advent of electronic

trading, deregulation, and globalization of the

equity markets are having a profound impact on

securities trading and price determination These

forces have led to major changes in market maker

operations in the recent past, and will continue to

do so in the coming years

NOTE

1 This material is modified from an equivalent entry from The New Palgrave Dictionary of Money and Finance, by Newman, Peter Reprinted with

permis-sion of Palgrave Macmillan Copyright ß Newman,

Peter.

REFERENCES Amihud, Y., Ho, T., and Schwartz, R.A (eds.) (1985) Market Making and the Changing Structure of the Securities Industry Lexington, MA: Lexington Books.

Amihud, Y and Mendelson, H (1980) ‘‘Dealership market: market making with inventory.’’ Journal of Financial Economics, 8: 31–53.

Bagehot, W (1971) ‘‘The only game in town.’’ Finan-cial Analysts Journal, 27: 12–14, 22.

Cohen, K., Maier, S., Schwartz, R.A., and Whitcomb,

D (1979) ‘‘Market makers and the market spread: a review of recent literature.’’ Journal of Financial and Quantitative Analysis, 14: 813–835.

Copeland, T and Galai, D (1983) ‘‘Information effects

on the bid-ask spread.’’ Journal of Finance, 38: 1457– 1469.

Demsetz, H (1968) ‘‘The cost of transacting.’’ Quar-terly Journal of Economics, 82: 33–53.

Garman, M (1976) ‘‘Market microstructure.’’ Journal

of Financial Economics, 3: 257–275.

Glosten, L and Milgrom, P (1985) ‘‘Bid, ask, and transaction prices in a specialist market with hetero-geneously informed traders.’’ Journal of Financial Economics, 14: 71–100.

Grossman, S.J and Stiglitz, J (1980) ‘‘On the impos-sibility of informationally efficient markets.’’ Ameri-can Economic Review, 70: 393–408.

Ho, T and Stoll, H (1981) ‘‘Optimal dealer pricing under transaction and return uncertainty.’’ Journal

of Financial Economics, 9: 47–73.

Ho, T and Stoll, H (1983) ‘‘The dynamics of dealer markets under competition.’’ Journal of Finance, 38: 1053–1074.

Neuberger, A and Schwartz, R.A (1990) ‘‘Current devel-opments in the London equity market.’’ Finanzmarkt und Portfolio Management, 3: 281–301.

O’Hara, M and Oldfield, G.S (1986) ‘‘The

microeco-nomics of market making.’’ Journal of Financial and

Quantitative Analysis, 21: 361–376.

Schwartz, R.A and Francioni, R (2004) Equity Markets

in Action: The Fundamentals of Market Structure and

Trading New York: John Wiley.

Smidt, S (1971) ‘‘Which road to an efficient stock market:

free competition or regulated monopoly?’’ Financial

Analysts Journal, 27: 18–20, 64–69.

Stoll, H (1985) ‘‘Alternate views of market making,’’

in Amihud, Ho and Schwartz (eds.) Market Making

and the Changing Structure of the Securities Industry Lexington Books, pp.67–92.

Stoll, H (1989) ‘‘Inferring the components of the bid-ask spread: theory and empirical tests.’’ Journal of Finance, 44: 115–134.

Tinic, S.M and West, R (1972) ‘‘Competition and the pricing of dealer services in the over-the-counter stock market.’’ Journal of Financial and Quantitative Analysis, 7: 1707–1727.

STRUCTURE OF SECURITIES MARKETS 1

ROBERT A SCHWARTZ, City University of New York, USA

LIN PENG, City University of New York, USA

Abstract

The entry reviews essential elements of market

structure – the systems, procedures, and protocols

that determine how orders are handled, translated

into trades, and transaction prices determined There

are various contrasting alternatives, such as

order-driven and quote-order-driven markets; consolidated vs

fragmented markets; human intervention vs

elec-tronic trading; and continuous markets vs periodic

call auctions A major objective of market design

noted in the discussion is to enhance the accuracy

with which prices are discovered in a dynamic,

un-certain environment Lastly, the entry points out

that market structures are rapidly changing, and

that much remains to be learned about how best to

structure a technologically sophisticated, hybrid

market that efficiently services the varied needs of

diverse participants

Keywords: call auctions; consolidated markets;

continuous markets; electronic trading;

fragmen-ted markets; hybrid market; market structure;

order-driven markets; price discovery;

quote-driven markets

The structure of a securities market refers to the

systems, procedures, and protocols that determine

how orders are handled, translated into trades, and

transaction prices determined To date, theoretical

security valuation models have generally not

con-sidered the effect of a market’s structure on asset

prices Formulations such as the Capital Asset

Pricing Model and the Arbitrage Pricing Theory, for example, address the risk and return dimen-sions of a security, but ignore considerations such

as liquidity, trading costs, information costs, and transaction uncertainty When these realities are taken into account, it is apparent that market structure matters, that it does affect the price and size of trades

Market structures differ significantly among major international equity market centers (see Schwartz and Francioni, 2004) The New York Stock Exchange (NYSE) and other U.S stock ex-changes are agency=auction markets where the market maker (specialist) acts as both dealer and broker’s broker Examples of a dealer market in-clude the Nasdaq market in the United States and the London Stock Exchange (LSE) before they introduced their electronic order-driven trading systems (Supermontage for Nasdaq and SETS for the LSE) The Tokyo Stock Exchange (TSE) is an agency=auction market where the market maker (saitori) handles the orders but does not take a dealership position Markets also differ in the way in which orders are consolidated or fragmen-ted, in the way in which information is dissemin-ated, and in the degree to which trading is computerized

Whether investors trade through an intermedi-ary, as in a dealer market, or directly with each other, as in an agency=auction market, is one of the most important distinctions in market struc-ture In a dealer market, the market maker initiates

trades by posting bid and ask quotations that are

publicly disseminated The bid is the price at which

public traders can sell to a dealer, and the ask is the

price at which they can buy from a dealer The bid–

ask spread is the dealer’s compensation for

provid-ing marketability services To achieve a trade in a

dealer market, a customer (usually via a broker)

contacts a dealer by telephone or electronically and

accepts his or her quotation

In an agency=auction market, public

partici-pants trade with each other, and floor

profes-sionals in an agency market such as the NYSE

act in a brokerage (agency) capacity When trading

is active in a stock, floor traders gather in a

‘‘crowd,’’ and trading truly takes place in an

auc-tion environment In the U.S exchanges, orders

are consolidated at the posts of specialists, who

are market professionals who function as both

principals and as agents Specialists have an

af-firmative obligation to buy and to sell shares so

as to make ‘‘a fair and orderly market’’ when

counterpart orders do not provide sufficient

liquid-ity They also have a negative obligation: when a

public order and a specialist’s quote are at the

same price, the specialist must step aside and let

the public order execute first

Two types of orders are commonly used in an

agency=auction market: limit orders and market

orders A limit order states the maximum price at

which a public investor is willing to buy, or the

minimum price at which the public investor is

will-ing to sell, a specified number of shares A market

order is unpriced; it states the number of shares

the investor wishes to trade ‘‘at market,’’ namely

the price prevailing when the order is received

by the market center To execute a market order,

limit orders must exist; for limit orders to exist,

there must be a facility for maintaining public

orders in a file (limit order book) This file

charac-terizes agency=auction exchanges Handa and

Schwartz (1996) have examined the costs and

re-turns to placing limit orders

Trades may also be negotiated if they are

diffi-cult to handle because of their size In an

agen-cy=auction environment such as the NYSE, a

buyer or seller may give a not held (NH) order to

a floor trader who uses his or her discretion to negotiate with other floor traders or to expose the order to the limit order book The floor trader is

‘‘not held to the price’’ if the order executes at a price inferior to that which existed at the time of its arrival Large orders are also negotiated in the

‘‘upstairs market,’’ a network of trading desks of securities dealers and institutional investors who bring buyers and sellers together at mutually ac-ceptable prices Trades may also be negotiated with a dealer and=or electronically through a facility such as Liquidnet or Pipeline Institu-tional investors commonly negotiate with the mar-ket makers to obtain larger sizes than the marmar-ket makers are quoting and=or prices that are within the bid–ask spread Large orders are also com-monly broken up (sliced and diced) and brought

to the market in smaller tranches for execution over an extended period of time

A major function of a market center is to find the prices at which shares are traded This process

is known as ‘‘price discovery.’’ The accuracy of price discovery depends on the systems used for handling orders, disseminating information, and making trades If an issue is traded in more than one market center, intermarket linkages including information systems and arbitrage operations must

be implemented to ensure both adequate price pro-tection for investors and price consistency across markets Intermarket linkages also connect equity markets and derivative product markets (for ex-ample, the futures and options markets for stock indices in Chicago and the cash market for shares

in New York)

Another feature of market structure is the means by which information concerning current market conditions (floor information) is trans-ferred among participants The informational sig-nal transmitted by a quote differs significantly from that transmitted by a transaction price A quote reflects an individual’s willingness to trade;

it is firm only up to its stated size and may be improved on in terms of price and=or quantity Quotes may also reflect trading strategy and

gaming by market participants A transaction price

has actually been accepted by both counterparties

to a trade, but relates to the past and does not

necessarily represent the price at which one can

trade in the present Nonetheless, latest transaction

prices do reflect current market conditions when

transactions occur frequently For this reason,

transaction price reporting has been introduced in

both the U.S and London dealer markets (see

Seguin, 1991)

The extent to which orders are fragmented or

consolidated in trading also defines a market’s

structure (see Cohen et al., 1986) A competitive

dealer market is naturally fragmented in the sense

that orders are routed to one of several dealer

firms This may be desirable because of the

com-petition for marketability services that

fragmenta-tion implies Most apparent is that bid–ask spreads

are tightened in a competitive dealer environment

compared to a monopoly dealer environment

(see Ho and Stoll, 1983) However, given the

frag-mented nature of a dealer market, dealers may not

be as closely regulated as the specialists in the

agency=auction market This may create incentives

for dealers to collude (see Christie and Schultz,

1994a,b) In 1996, the justice department settled

with the Nasdaq dealers on accusations of spread

collusion

Another problem of the dealer market is that

fragmenting the order flow across different dealer

firms can obscure information and impair the

accu-racy of price determination (see Neuberger and

Schwartz, 1990) However, in a screen-based system

such as the US Nasdaq market, each dealer firm does

see the quotes posted by the others A dealer market

with fragmented orders may also reduce the

oppor-tunity for the interaction of all buying and selling

interest in that security and thus reduce price

com-petition In 1997, the U.S Securities and Exchange

Commission enacted the Order-Handling Rules

(OHRs), which required that public limit orders be

exposed in the national best bid and offer (NBBO)

The rules set in motion the transition of the Nasdaq

market from a predominantly quote-driven, dealer

market towards an order-driven, agency market

Order flow in an agency=auction environment

is by its nature more consolidated than in a com-petitive dealer market Consolidation is desirable because it allows orders to be matched against each other with a minimum of broker–dealer inter-vention Furthermore, the consolidation of orders facilitates the enforcement of order exposure and trading priority rules The primary priority rule is price; highest-priced bids and lowest-priced asks have precedence A secondary priority rule speci-fies the sequence in which orders at the same price execute; usually, the first order entered at the price

is the first to execute (time priority) However, too much consolidation may lead to monopoly power for a single market center, which may lead it to lose its incentive to reduce transaction costs and to innovate

An agency=auction market is fragmented when shares are listed on more than one exchange, traded in-house by a brokerage firm, on an Alter-native Trading System (ATS) and=or on an Elec-tronic Communications Network (ECN) This fragmentation may be desirable if it truly repre-sents competition between market centers It is not desirable if one market center free-rides on the prices discovered by another market center For example, a satellite market may guarantee trades

at the best price quoted in a major market center and charge lower commissions for the service Order consolidation facilitates the consolidation and transference of floor information For ex-ample, NYSE specialists are in a unique position from which to observe the order flow and to set prices that are reasonable given the current de-mand for shares But, like the saitori in Tokyo, specialists are not permitted to receive orders dir-ectly from customers, which restricts their access to information In contrast, both dealers can receive orders directly from customers, including institu-tional traders This contact enables them to obtain further information about market conditions

In addition to being spatially (geographically) consolidated, orders can be consolidated temporally (over time) Orders are temporally consolidated when they are bunched together in call auction

trading In continuous trading, orders are executed

whenever they cross during trading hours and, in a

continuous market, trades are generally bilateral In

contrast, in call auction trading, orders are stored

for simultaneous execution in multilateral trades at

predetermined times when the market is ‘‘called.’’

Call market trading has certain advantages (see

Schwartz and Francioni, 2004) In particular,

de-pendence on the intermediation of dealers and

brokers is lessened and trading costs are reduced

Since everyone trades at the same price, at the

same time and under the same conditions, call

market trading is fairer, and the procedure can

produce prices that are more accurate and less

volatile But, traditional call market trading has

had its limitations Accessibility to the market

was restricted and the dissemination of floor

infor-mation poor in the old call markets of Europe

These limitations can be overcome with the use of

computer technology Pagano and Schwartz (2003)

have found that the introduction of electronic call

auctions at market closings on the Paris Bourse

(now Euronext Paris) reduced transaction costs

and improved price discovery

One of the more striking changes in market

struc-ture that occurred as the twentieth century drew to

a close was the advent of electronic trading At

its inception, electronic systems tended to mimic

existing systems; now they are more commonly

developing their own distinctive functionality The

first electronic exchange, the Computer Assisted

Trading System (CATS), was introduced by the

Toronto Stock Exchange in 1977 CATS is based

on the principle of continuous trading in an

agen-cy=auction environment The success of CATS has

led to the implementation of similar systems in

Tokyo (1982), Paris (1986), and elsewhere Small

order execution systems were also introduced in

the U.S and London dealer markets in the 1980s

Now most national equity markets around the

globe provide floorless, electronic trading

plat-forms The major exceptions, the New York Stock

Exchange in the U.S., is in the process of converting

to a hybrid structure that integrates an electronic

platform (Directþ) with its trading floor.

Electronic technology has strong advantages: it gives participants direct access to markets and control over their orders regardless of geographic location; it provides direct access to information concerning current market conditions; it provides anonymity; it enables the investors to trade with-out a broker and thus reduce transaction costs; and, as systems become increasingly sophisticated, the computational power of the computer facili-tates the handling of institutional-sized orders and the negotiation of trades Investors in the 1990s have witnessed a proliferation of fourth-market organizations Electronic facilities such as Instinet and Archipelago allow members to post orders and to match that of other traders in the system Crossing systems such as Posit and Instinet’s Crossing Network allow investors to trade portfo-lios directly without a bid–ask spread Liquidnet and Pipeline allow participants to find each other on their screen and negotiate their trades electronically

Electronic technology solves the major problems associated with call market trading: restricted accessibility to a market and inadequate dissem-ination of floor information (see Pagano and Schwartz, 2003) Reciprocally, a call market en-vironment may be more suitable than the continu-ous market for the use of electronic technology

In particular, the submission and handling of in-stitutional-sized orders can be accommodated in

an electronic call (see Schwartz and Francioni, 2004)

Because of strong vested interests, technological inertia, and the ability of an established market center to retain order flow, the superiority of a new system may not ensure its acceptance Market structure has evolved slowly in the United States since trading moved from coffee houses and curbs into exchanges (the American Stock Exchange did not move indoors until 1921) The pace of change accelerated in the mid-1970s with the passage of the U.S Securities Acts Amendments of 1975, which precluded fixed commissions and mandated the development of a national market system London’s Big Bang in 1986 also precluded fixed

commissions, broadened competition between

dealers and brokers, and further spurred the

glob-alization of trading More recently, the NYSE and

Nasdaq have completed a conversion from

frac-tional to decimal prices under the pressure of the

SEC Technological developments, inter-market

competition, and regulation will no doubt continue

to reshape securities markets around the world

However, achieving meaningful change in market

structure is not an easy task; much remains to be

learned about how best to structure a

technologic-ally sophisticated, hybrid market that efficiently

services the varied needs of diverse participants

NOTE

1 This material is modified from an equivalent entry

from: The New Palgrave Dictionary of Money and

Finance, by Peter Newman Reprinted with

permis-sion of Palgrave Macmillan Copyright S Newman,

Peter.

REFERENCES Amihud, Y., Ho, T and Schwartz, R.A (eds.) (1985).

Market Making and the Changing Structure of the

Se-curities Industry Lexington, MA: Lexington Books.

Cohen, K., Maier, S., Schwartz, R.A., and Whitcomb,

D (1979) ‘‘Market makers and the market spread: a

review of recent literature.’’ Journal of Financial and

Quantitative Ana1ysis, 14: 813–835.

Cohen, K., Maier, S., Schwartz, R.A., and Whitcomb,

D (1986) The Microstructure of Securities Markets Englewood Cliffs, New Jersey: Prentice-Hall Christie, W.G and Schultz, P.H (1994a) ‘‘Why do NASDAQ market makers avoid odd-eighth quotes?’’ Journal of Finance, 49: 1813–1840.

Christie, W.G., Harris, J., and Schultz, P.H (1994b).

‘‘Why did NASDAQ market makers stop avoiding odd-eighth quotes?’’ Journal of Finance, 49: 1841– 1860.

Handa, P and Schwartz, R.A (1996).‘‘Limit order trading.’’ Journal of Finance, 51: 1835–1861.

Ho, T and Stoll, H (1983) ‘‘The dynamics of dealer markets under competition.’’ Journal of Finance, 38: 1053–1074.

Neuberger, A and Schwartz, R.A (1990) ‘‘Current developments in the London equity market.’’ Finanz-markt und Portfolio Management, 3: 281–301 Pagano, M and Schwartz, R.A (2003) ‘‘A closing call’s impact on market quality at Euronext Paris.’’ Journal of Financial Economics, 68: 439–484 Schwartz, R.A and Francioni, R (2004) Equity Mar-kets in Action: The Fundamentals of Market Structure and Trading New Jersey: John Wiley.

Seguin, P (1991) ‘‘Transactions reporting, liquidity and volatility: an empirical investigation of national market system listing.’’ Paper given at Western Finance Association Meetings, Jackson Hole, Wyoming, June.

US Securities and Exchange Commission (SEC) (2000) NYSE Rulemaking: Notice of filing of proposed rule change to rescind exchange rule 390; Commission request for comment on issues related to market fragmentation Release No SR-NYSE-99–48.