Market Quality and Information Known to Market Makers

Abstract

Market makers often have concentration of information due to their unique positions in securities markets. Whether their information sources should be made accessible to other market participants is a public policy concern. This article provides insights into the issue in theoretical perspective. We show that disclosure of market makers’ information tends to increase market liquidity and decrease the costs of uninformed trading when the competition in market making is intense. When the competition is weak, however, the disclosure will decrease market liquidity and increase the trading losses of uninformed traders. The results have public policy implications for improving the quality of securities markets and promoting the interest of public investors.