Abstract
This article uses transaction data to analyze the impact of asymmetric information and market marker risk aversion on the size of market maker profits. The observed bid-ask spread across the 14 stocks in the sample lies in the range of 1–5%. In the absence of asymmetric information and risk aversion, market makers would expect to receive half the spread on average as profit. In fact, their profit is less than half of this for all shares in the sample, and in half the stocks it is actually negative. A methodology is developed to identify separately the impact of information effects and risk aversion, but the results are inconclusive.
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Neuberger, A.J. An empirical examination of market maker profits on the London stock exchange. J Finan Serv Res 6, 343–372 (1993). https://doi.org/10.1007/BF01046075
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DOI: https://doi.org/10.1007/BF01046075