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Abstract
This study investigates the impact of market maker competition on the relationship between equity bid-ask spreads and informed trading risk from reported insider purchases. It is the first study to provide evidence that the relationship between inside spreads and insider purchases is stronger when there are fewer market makers or more concentrated market making shares. No evidence is found of a relationship between inside ask depth and reported insider purchases. The results are consistent with theoretical expectations that spreads will respond more to informed trading risk under less competitive market making conditions. However, the results are contrary to the DuPont (Citation2000) prediction that market makers alter depth more than spread in response to informed trading risk.
Acknowledgements
I would like to thank Timothy McCormick of NASDAQ for providing the NASDAQ and NASTRAQ data used in this study. I would like to thank Bill Baber, Pat Fishe, John Glascock, Mark Klock, Peter Locke, Timothy McCormick, Michel Robe and Chris Snyder for their comments and suggestions.