Are Market Makers Uninformed and Passive? Signing Trades in The Absence of Quotes
May 2009
Research Paper
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We develop a new likelihood-based approach to sign trades in the absence of quotes. It is equally efficient as existing MCMC methods, but more than 10 times faster. It can deal with the occurrence of multiple trades at the same time, and noisily observed trade times. We apply this method to a high-frequency dataset of the 30Y U.S. treasury futures to investigate the role of the market maker. Most theory characterizes him as an uninformed passive liquidity supplier. Our results suggest that some market makers actively demand liquidity for a substantial part of the day and are informed speculators.
Keywords
Classifications using
Journal of Economic Literature (JEL) Classification System
- G14 : Information and Market Efficiency; Event Studies
- E44 : Financial Markets and the Macroeconomy
- C22 : Time-Series Models; Dynamic Quantile Regressions
Automatically Extracted Terms
- trade
- market
- inventory
- market makers
- maker
- trader
- price
- method
- model
- state
- position
- announcement
- market maker
- future
- trading
- liquidity
- inventory position
- result
- percentage
- study
