How do securities dealers trade in the Taiwan stock market? Evidence from the financial crisis of 2008

摘要

Securities dealers in Taiwan are granted trading advantages and expected to act as market makers to provide liquidity. However, since there are no designated dealers in Taiwan, securities dealers have no obligation to balance the market orders in any case. This paper investigates whether securities dealers act as proprietary traders to trade for their own interests or as market makers to fulfil market efficiency. The evidence shows securities dealers do act as market makers. Moreover, market making is the predominant cause of securities dealers' herding in Taiwan. However, during the 2008 financial crisis, they cannot help fend for themselves by acting as proprietary traders rather than liquidity providers. Even after the crisis, they do not reverse their roles to be market makers. Instead, they serve as contrarian traders selling stocks with positive past returns. This result signifies the necessity of having designated dealers in Taiwan stock market.