Common market makers and commonality in liquidity

Abstract

Each NYSE specialist firm provides liquidity for more than one common stock. As a result of shared capital and information among specialists within a firm, we argue that stock liquidity will co-move with the liquidity of other stocks handled by the same specialist firm, with magnitude increasing with the risk of providing liquidity. The evidence indicates that individual stock liquidity co-varies with specialist portfolio liquidity apart from information reflected by market liquidity variation. Further tests based on specialist firm size, specialist firm mergers, and market returns indicate that liquidity co-variation increases with the risk of providing liquidity.