Market Conditions, Fragility and the Economics of Market Making
Syracuse University - Whitman School of Management
Southern Methodist University (SMU) - Edwin L. Cox School of Business
July 20, 2015
Using audit-trail data from Toronto Stock Exchange, we find empirical support for regulatory concerns that market makers scale back in unison when market conditions are unfavorable, which contributes to co-variation in liquidity supply, both within a stock and across stocks. Market conditions lower aggregate participation via their impact on trading profits and risk. Contrary to regulatory view, higher stock volatility is associated with more participation and higher profits, even after controlling for other market conditions, including stock volume. Fragility concerns extend to the larger stocks in the market and the active participants in a stock. The Designated Market Maker (DMM) mitigates periodic illiquidity created by synchronous withdrawal by market makers in both large and small stocks.
Number of Pages in PDF File: 52
Keywords: Market Makers; HFTs; Fragility; Volatility; Obligations
JEL Classification: G20
Date posted: November 21, 2012 ; Last revised: July 28, 2015
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.203 seconds