How Market Makers Affect Efficiency: Evidence that Markets are Becoming Less Efficient

Abstract

Abstract: Stock exchanges around the world have integrated a hybrid trading system. This has added anonymity for traders, making it harder for market makers to match large continuous trades, leading to an increase in volatility and a decrease in informational efficiency. This occurs because less information is contained in the price of a stock at any given time. Using a relative difference-in-difference estimation, I find that with increasing adoption of the hybrid market, there is increasing market volatility (for both the NYSE and LSE) relative to an electronic market. Although the use of a hybrid market may increase transaction speed, it decreases informational efficiency.