Market Microstructure.

Members of the NBER's Working Group on Market Microstructure met in Cambridge on May 11. Organizers Bruce Lehmann, University of California, San Diego; Andrew Lo, NBER and MIT; Matthew Spiegel, Yale University; and Avanidhar Subramanyam, University of California, Los Angeles, chose these papers to discuss:

Amber Anand and Daniel G. Weaver, Baruch College, "The Value of the Specialist: Empirical Evidence from the CBOE"

Discussant: Kumar Venkataraman, Southern Methodist University

Alex Boulatov and Dirk Hackbarth, University of California, Berkeley, "A Model of Liquidity Risk in Dynamic Economies"

Discussant: Harry Mamaysky, MIT

Malay K. Dey, University of Massachusetts, Amherst, and B. Radhakrishna, University of Minnesota, "Institutional Trading, Trading Volume, and Spread"

Discussant: Jennifer Koski, University of Washington

Mark Coppejans, Duke University, Tan Domowitz, Pennsylvania State University, and Ananth Madhavan, ITG, Inc., "Liquidity in an Automated Auction"

Discussant: Chester Spatt, CarnegieMellon University

Pankaj Jain, Indiana University, "Institutional Design and Liquidity on Stock Exchanges"

Discussant: Venkatesh Panchapagesan, Washington University

Amy K. Edwards, Securities and Exchange Commission, and Jeffrey H. Harris, University of Notre Dame, "Stepping Ahead of the Book"

Discussant: Simon Gervais, University of Pennsylvania

Using proprietary data and an event unique in the history of financial markets, Anand and Weaver study the value that a specialist system adds vis-a-vis a multiple market maker system. Specifically, they analyze the "natural experiment" of the institution of a specialist system for equity options on the Chicago Board Options Exchange (CBOE) in the second half of 1999. The literature predicts a decrease in spreads and an increase in depth attributable to the change to a specialist system on the CBOE; their findings support these hypotheses. The changes are more pronounced for lower volume securities and smaller trades. There is also limited evidence that the market share of the CBOE increases in the period after the option class moves on to the specialist system, suggesting increased competitiveness for the CBOE. The authors also analyze the implications of the move arising from single listing of certain options and the lack of a national market system for options during the sample period.

Boulatov and Hackbarth analyze a continuous auction model of liquidity risk in asset markets with symmetrically...