Abstract

What is the Performance of the „Makler"?

An Empirical Analysis Based on the Example of the Frankfurt Stock Exchange

The present contribution represents a detailed empirical analysis of the role of the specialists („Makler“) operating at the Frankfurt Stock Exchange. The dataset employed permits the impact of specialist activities on liquidity and volatility to be analysed as well as the profitability of the specialists’ transactions to be evaluated. Specialist participation in floor trading is substantial. The trades they make for their own accounts account for over 20 % of the volume in the batched auctions and for over 40 % of the volume in the continuous trading session. It is also shown with regard to the latter that specialist activities visibly help reduce the bid-ask spread. The effective spread ultimately paid is less than one-third of the spread calculated from the orders in the specialist’s limit order book. It is shown that specialist participation in the batched auctions results in reduced volatility. The specialists’ impact on volatility is sometimes evaluated on the basis of the „specialist stabilization ratio“. We argue, however, that this measure does not supply meaningful results. During our sample period specialists did, on average, not earn profits on the trades they made for their own account. Decomposing overall profits shows that positive spread revenues cannot compensate for positioning losses. Overall, our analysis shows that specialists are contributing towards a higher quality of Germany’s stock markets. The implications of these results for the way in which stock trading should be organized in Germany are discussed.