Abstract

http://ssrn.com/abstract=2179259
 
 

References (43)



 
 

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Market Conditions, Obligations and the Economics of Market Making


Amber Anand


Syracuse University - Whitman School of Management

Kumar Venkataraman


Southern Methodist University (SMU) - Edwin L. Cox School of Business

June 14, 2014


Abstract:     
Recent regulatory attention has focused on market makers who have no obligations to supply liquidity. Using audit-trail data from Toronto Stock Exchange, we examine how market conditions and exchange-assigned obligations influence the economics of market making. We show that trading profits are higher, inventory risk is lower, and voluntary participation by market makers is higher when both firm and market-wide volatility are high. Market makers scale back on participation when market conditions lower profit potential and increase inventory risk. Under these conditions, market makers with obligations earn smaller profits, assume higher risk, and participate in undesirable trades, especially in less active stocks. Our study identifies circumstances when obligations become binding and highlights the related but largely neglected issue of compensating market makers with obligations.

Number of Pages in PDF File: 51

Keywords: designated market maker, high frequency trader, market design, electronic limit order book

JEL Classification: G20

working papers series


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Date posted: November 21, 2012 ; Last revised: June 26, 2014

Suggested Citation

Anand, Amber and Venkataraman, Kumar, Market Conditions, Obligations and the Economics of Market Making (June 14, 2014). Available at SSRN: http://ssrn.com/abstract=2179259 or http://dx.doi.org/10.2139/ssrn.2179259

Contact Information

Amber Anand (Contact Author)
Syracuse University - Whitman School of Management ( email )
721 University Avenue
Syracuse, NY 13244
United States
Kumar Venkataraman
Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )
P.O. Box 750333
Dallas, TX 75275-0333
United States
214-768-7005 (Phone)
214-768-4099 (Fax)
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