Market Makers as Information Providers: The Natural Experiment of STAR

54 Pages Posted: 24 Dec 2008 Last revised: 29 Nov 2010

See all articles by Pietro Perotti

Pietro Perotti

University of Bath - School of Management

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin

Date Written: July 1, 2010

Abstract

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

Perotti, Pietro and Rindi, Barbara, Market Makers as Information Providers: The Natural Experiment of STAR (July 1, 2010). Journal of Empirical Finance, Vol. 17, No. 5, pp. 895-917, December 2010. Available at SSRN: https://ssrn.com/abstract=1320129

Pietro Perotti (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://www.bath.ac.uk/management/faculty/pietro-perotti.html

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 58365328 (Phone)

HOME PAGE: http://faculty.unibocconi.eu/barbararindi

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