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Making a market with spreads and depths Kee H. Chung* and Xin Zhao Key words: Nasdaq; Liquidity providers; Quote revisions JEL classification: G14 Motivation Market makers post both the price and quantity of shares that they are willing to trade. Example Bid price = $22 1/16 Bid size = 1000 shares Ask price = $22 5/16 Ask size = 1400 shares Most previous studies focus only on price quotes. The main focus of these studies has been: how securities dealers establish their bid-ask spreads to recoup the order processing, inventory, and adverse selection costs how spreads can be divided into these components. See, for example, Demsetz (1968), Benston and Hagerman (1974), Stoll (1978, 1989), Cohen et al. (1981), Ho and Stoll (1981), Copeland and Galai (1983), Glosten and Milgrom (1985), Glosten and Harris (1988), Glosten (1989), Foster and Viswanathan (1991), and Huang and Stoll (1997).  Studies of spreads and depths Lee, Mucklow, and Ready (1993) Examine intraday variation in spreads and depths on the NYSE and show that wide spreads are accompanied by small depths. Spreads widen and depths drop immediately prior to quarterly earnings announcements. Information asymmetry risk increases immediately prior to anticipated news events. Harris (1994) Analyzes the effect of the minimum price variation (MPV) on NYSE specialists quotes. MPV affects the depth when it is larger than the spread that dealers would otherwise quote (i.e., when MPV is a binding constraint). Harris suggests that a binding MPV increases depths. When the spread equals MPV as a binding constraint, liquidity providers will find it profitable to supply liquidity and as a result, they are likely to offer large depths. Kavajecz (1996) and Kavajecz and Odders-White (1999) Suggest that NYSE specialists use depths as a strategic variable to reduc