Market maker performance: The search for fair weather market makers

The London Stock Exchange has long been concerned that some market makers d o not fulfill their obligations. This study describes a range of measures t o identify such fair weather market makers. The results indicate that three firms of market makers meet the criteria for fair weather market making. I t is also discovered that market makers in a given stock all quote the same fixed spread in round pennies and that this is about twice the touch. Inte rnalized order flow is pervasive, with market makers receiving 57% of their order flow from associated brokers. However, fair weather market making is found to be distinct from order preferencing and internalization.