Participation strategy of the NYSE specialists to the posted quotes

Using 2001 NYSE system order data in the decimal pricing environment, we analyze how the specialists react to the changes in market variables while making participation decisions to the posted quotes. We find that the primary factors that affect the specialists’ strategy are the changes in the best prices and depths on the limit order book. Specialists participate to the posted quotes more for low-volume or high-price stocks. Unlike some previous studies, we find significant inventory effects. The levels of specialists’ participation to the posted quotes have predictive power over future stock returns, which is stronger for short-term returns.