Market makers drive up bid-ask spreads, impacting traders and prices.
The article explores how market makers compete to provide liquidity in financial markets. They found that market makers set prices higher than necessary due to competition, leading to wider bid-ask spreads. These spreads are influenced by both adverse selection and market competition. The study suggests a new way to measure market competitiveness using transaction data. Overall, the research sheds light on how market dynamics affect pricing and liquidity provision.