Market Makers as Information Providers: The Natural Experiment of STAR
54 Pages Posted: 24 Dec 2008 Last revised: 29 Nov 2010
Date Written: July 1, 2010
Market makers are financial intermediaries who are supposed to provide additional liquidity, but do not have any information-related obligation. This paper studies the unique case of the Italian Stock Exchange, where market makers are also obliged to facilitate information disclosure about the firms they cover. We focus on a group of small/medium capitalization stocks (STAR) that are assigned a designated market maker (DMM) starting from 2001. We show that their liquidity requirements are not binding during the sample periods and that the main impact of DMMs´ introduction is due to their obligations on information provision. We find that DMMs' activity as information providers reduces spread and price volatility, the probability of informed trading (PIN), and the adverse selection component of the spread. An event study provides evidence that the information released through DMMs is perceived as useful by market participants.
Keywords: specialists, information disclosure, limit order books, market quality, information asymmetries
JEL Classification: G10, G14, D82
Suggested Citation: Suggested Citation