Market Makers and the Market Spread: A Review of Recent Literature

Abstract

Academic attention has increasingly been focused on the operation of security markets. This is largely due to the impetus provided by the Institutional Investor Study (see U.S. Securities and Exchange Commission [35]), by the Securities Act Amendments of 1975 whereby Congress mandated the development of a national market system (NMS), and by the expanding computer technology of the 1970s. Not surprisingly, much of the attention has focused on the role of dealers and stock exchange specialists as market makers. The literature has generally viewed these market makers as suppliers of immediacy to ordinary traders, and has taken the bid-ask spread to be the price they impose for the provision of this service.