Roger D. Huang

The Quality of ECN and Nasdaq Market Maker Quotes

This paper compares the quality of quotes submitted by electronic communication networks (ECNs) and by traditional market makers to the Nasdaq quote montage. An analysis of the most active Nasdaq stocks shows that ECNs not only post informative quotes, but also, compared to market makers, ECNs post quotes rapidly and are more often at the inside. Additionally, ECN quoted spreads are smaller than dealer quoted spreads. The evidence suggests that the proliferation of alternative trading venues, such as ECNs, may promote quote quality rather than fragmenting markets. Moreover, the results suggest that a more open book contributes to quote quality.

Tick Size, Bid-Ask Spreads, and Market Structure

We propose a link between market structure and the resulting market characteristics—tick size, bid-ask spreads, quote clustering, and market depth. We analyze transactions data of stocks traded on the London Stock Exchange, a dealer market. We conclude that market charateristics are endogenous to the market structure. The London dealer market does not have a mandated tick size, and it exhibits higher spreads, higher quote clusterings, and higher market depth than the NYSE auction market. Clustering of trade prices is similar in London and New York.

Time-Varying Return and Risk in the Corporate Bond Market

This paper examines the pricing of exchange-traded long-term corporate bond portfolios. Observable instruments measuring the term structure of interest rates, levels of bond and stock prices, and a January dummy are found to predict excess returns on corporate bonds. An intertemporal asset pricing model with changing expectations and unobservable factors is then estimated for the predictable excess returns using Hansens Generalized Method of Moments. The results show that a multibeta linear time-varying model of con? ditional expected returns with constant betas can successfully value corporate bonds. Spe? cifically, the tests indicate the presence of two time-varying hedge portfolios. The data, however, support a single latent variable specification when all January observations are excluded. This result suggests the existence of a strong January seasonal in one of the latent variables.

Exchange rates and firms' liquidity: evidence from ADRs

Abstract Exchange rate changes can, in principle, affect a firms value by affecting the firms earnings or its cost of funds. Existing studies using monthly data over long sample periods find little or no impact of changes in exchange rates on a firms valuation. We examine a different potential path for exchange rate effects, namely the effect of exchange rate variability on a stocks liquidity. Using transactions data, we examine the microstructure characteristics of United Kingdom and Mexican American Depositary Receipts (ADRs) around two major exchange rate crises — the pound sterling withdrawal from the European Exchange Rate Mechanism in September 1992 and the Mexican devaluation of December 1994. We conclude that these events of exchange rate turbulence had little or no effect on the trading costs of ADRs in the United States. The results suggest that the impact of exchange rate volatility on market liquidity is not a conduit by which stock values are affected.

Do Market Makers Suffer from Splitting Headaches

Studies of transactions surrounding stock split ex-dates often conclude that splitting firms either experience a decline or an improvement in their stocks liquidity, based on independent measures of trading costs and trading activity. In contrast, our evidence suggests that splits from outside into what often is deemed to be the “optimal” stock price range of

Market Microstructure and Stock Return Predictions

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Information-Based Trading in Dealer and Auction Markets: An Analysis of Exchange Listings

39.99 are “nonevents” for market makers: The spread-setting behavior of the market does not change after a split. Our analysis accounts for the interdependencies between bid-ask spreads and market microstructure effects and distinguishes between optimal and all other splitting firms.