Abstract

http://ssrn.com/abstract=2179259
 
 

References (43)



 
 

Footnotes (28)



 


 



Should Exchanges Impose Market Maker Obligations?


Amber Anand


Syracuse University - Whitman School of Management

Kumar Venkataraman


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

July 2013


Abstract:     
Using Toronto Stock Exchange data, we study the trades of Endogenous Liquidity Providers (ELPs), who supply liquidity because it is a profitable activity, and those of Designated Market Makers (DMMs), who have exchange-assigned obligations to maintain markets. We focus on concerns related to fragility and gaps in coverage when markets rely on ELPs for liquidity provision. We show that ELPs are active participants during periods of high volatility and days preceding earnings announcements. However, when market conditions reflect high inventory risk, such as periods with low volume or one-sided order flow, ELPs exercise the option to withdraw from the market. Under these conditions, DMMs earn smaller profits, assume higher inventory risk, and commit more capital, suggesting that liquidity contracts oblige DMMs to participate in undesirable trades, especially in less active stocks, where they are the only reliable counterparties available to investors. Our results document market conditions under which a hybrid market structure, comprising a limit order book and a DMM, improves outcomes for investors, and ultimately the listed firm.

Number of Pages in PDF File: 50

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: July 17, 2013

Suggested Citation

Anand, Amber and Venkataraman, Kumar, Should Exchanges Impose Market Maker Obligations? (July 2013). 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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