Source: Dissertation Abstracts International, Volume: 66-05, Section: A, page: 1886.

Director: George Hall.

This dissertation examines empirically and theoretically the trading and price setting behavior of specialists on the New York Stock Exchange. In the second chapter I examine empirically stylized facts about the specialists' trading behavior. The analysis in this chapter suggests that the specialist is an active investor who seeks to buy stocks when prices are low and to sell when prices are high. This suggests that the specialists do not set prices in order to control fluctuations in their inventory, but rather set their inventory in accordance with their expectations about future prices.

Motivated by the empirical results of chapter two, I formulate and solve a dynamic structural model of a specialist's optimal trading and price setting behavior in chapter three. In contrast to much of the previous literature I explicitly assume that specialists set prices to maximize profits rather than to minimize inventory costs. The specialist trades using his information advantage while taking into account the continuous trading relationships he must maintain on the trading floor as well as the regulations of the New York Stock Exchange. The numerical solution to this model implies two testable implications connecting past price volatility to specialist trading and quoting behavior. These two implications are then characterized empirically in chapter four using specialist-specific NYSE trade-level data from the early nineties. I find evidence that specialist trading behavior is affected by past price volatility. More recent trade-level data are used to look for evidence of this behavior in non-specialist specific data from both the NYSE and the NASDAQ. The results from these tests are not in accordance with the model's findings, which may indicate that the role of the specialist has diminished over time from 1990 to 2004.