No abstract

No abstract

We model how intensively dealers monitor public information to avoid being picked off by professional day traders when monitoring is costly. Price competition among dealers is hampered by their incentive to share monitoring costs. The risk of being picked off by the day traders makes dealers more competitive. The interaction between these effects determines whether a firm quote rule improves trading costs and price discovery. Our empirical results support the prediction that professional day traders prefer stocks with small spreads, but offers less support for the prediction that their trading leads to wider dealer spreads.