Local market makers, liquidity and market quality

Simi Kedia, Xing Zhou

Research output: Contribution to journalArticlepeer-review

15 Scopus citations


We examine the role of geographically proximate (local) market makers in providing liquidity and improving the quality of a dealer market. Firms with active participation of local dealers enjoy lower quoted and effective spreads, as well as more informative prices. The beneficial effects from local market makers are not confined to a few "top" local dealers and they cannot be attributed to their participation in the firm's IPO syndicate or industry specialization. Further, we find that days with aggressive bidding from local market makers relative to their non-local counterparts are associated with significant positive abnormal returns, consistent with local market makers possessing information advantages. In summary, our results suggest that the information advantages of local market makers may be a contributing factor to the reduction in the cost of trading.

Original languageEnglish (US)
Pages (from-to)540-567
Number of pages28
JournalJournal of Financial Markets
Issue number4
StatePublished - Nov 2011

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


  • Geography
  • Information advantages
  • Liquidity
  • Market quality
  • Trading costs


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