Do Exchange-Contracted Market Makers Improve Market Quality for Liquid Stocks?
44 Pages Posted: 20 Jun 2016
Date Written: June 20, 2016
Abstract
This paper studies the impact of contracted market makers by investigating the liquidity provider scheme in Sweden. The results show that the stocks become more liquid after the introduction of the contracted market makers. The liquidity improvement is explained by reduced order processing cost and adverse-selection cost. High frequency traders are likely to use the scheme and function as contracted market makers, whose trading behavior contribute to documented liquidity improvement. After the scheme, market makers’ liquidity supply becomes more consistent and less dependent on the market condition.
Keywords: market maker, market impact, high frequency trader, trading behavior, market design
JEL Classification: G10, G14, G15, G18
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