DEALER MARKETS UNDER STRESS - THE PERFORMANCE OF NASDAQ MARKET MAKERSDURING THE NOVEMBER 15, 1991, MARKET BREAK

The liquidity of the NASDAQ market was seriously undermined during the crash on October 19, 1987, when bid-ask spreads widened dramatically and dealers reputedly withdrew from market making. This paper studies the liquidity of 36 NASDAQ issues on November 15, 1991, when average p rices fell over 4%, representing the first major correction in the pos t-crash era. We find that bid-ask spreads, the percentage of dealers p osting inside quotes, and trading volume remained virtually unaffected . Effective spreads were also largely unaffected, except for trades in excess of 1,000 shares among issues whose market makers avoided odd-e ighth quotes. Our evidence implies that, unlike October 1987, the liqu idity of the NASDAQ market did not deteriorate appreciably during this episode of unusual market stress.