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Market structure:The specialist as dealer and broker

Authors
Journal
Journal of Banking & Finance
0378-4266
Publisher
Elsevier
Publication Date
Volume
10
Issue
1
Identifiers
DOI: 10.1016/0378-4266(86)90018-x
Disciplines
  • Design

Abstract

Abstract Models of a specialist's spread-setting behavior have focused on the specialist's role as a dealer and have generally not considered competition from limit orders. In this paper, a model of spread-setting behavior is described and used to study the competitive effect of public limit orders and the nature of the relationship between the specialist's dual functions as dealer and broker. The analysis indicates that public limit orders are an effective form of competition and that the dual functions of the specialist tend not to be complementary. An expression for the expected market spread is also derived and the impact on the market spread of the specialist's spread is discussed. These results have implications for the design of an improved market system.

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