THE TRADES OF MARKET MAKERS - AN EMPIRICAL-ANALYSIS OF NYSE SPECIALISTS

This paper presents a transaction-level empirical analysis of the trad ing activities of New York Stock Exchange specialists. The main findin gs of the analysis are the following. Adjustment lags in inventories v ary across stocks, and are in some cases as long as one or two months. Decomposition of specialist trading profits by trading horizon shows that the principal source of these profits is short term. An analysis of the dynamic relations among inventories, signed order flow, and quo te changes suggests that trades in which the specialist participates h ave a higher immediate impact on the quotes than trades with no specia list participation.