Designating Market Maker Behaviour in Limit Order Book Markets

36 Pages Posted: 19 Aug 2015

See all articles by Efstathios Panayi

Efstathios Panayi

University College London - Financial Computing and Analytics Group, Department of Computer Science

Gareth Peters

Department of Actuarial Mathematics and Statistics, Heriot-Watt University; University College London - Department of Statistical Science; University of Oxford - Oxford-Man Institute of Quantitative Finance; London School of Economics & Political Science (LSE) - Systemic Risk Centre; University of New South Wales (UNSW) - Faculty of Science

Jon Danielsson

London School of Economics - Systemic Risk Centre

Jean-Pierre Zigrand

London School of Economics - Department of Finance, Systemic Risk Centre, and Financial Markets Group

Date Written: August 18, 2015

Abstract

Financial exchanges provide incentives for limit order book (LOB) liquidity provision to certain market participants, termed designated market makers or designated sponsors. While quoting requirements typically enforce the activity of these participants for a certain portion of the day, we argue that liquidity demand throughout the trading day is far from uniformly distributed, and thus this liquidity provision may not be calibrated to the demand. We propose that quoting obligations also include requirements about the speed of liquidity replenishment, and we recommend use of the Threshold Exceedance Duration (TED) for this purpose. We present a comprehensive regression modelling approach using GLM and GAMLSS models to relate the TED to the state of the LOB and identify the regression structures that are best suited to modelling the TED. Such an approach can be used by exchanges to set target levels of liquidity replenishment for designated market makers.

Keywords: Limit Order Book, liquidity, resilience, GLM, GAMLSS

JEL Classification: C41, C52, D47

Suggested Citation

Panayi, Efstathios and Peters, Gareth and Danielsson, Jon and Zigrand, Jean-Pierre, Designating Market Maker Behaviour in Limit Order Book Markets (August 18, 2015). Available at SSRN: https://ssrn.com/abstract=2646649 or http://dx.doi.org/10.2139/ssrn.2646649

Efstathios Panayi (Contact Author)

University College London - Financial Computing and Analytics Group, Department of Computer Science ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Gareth Peters

Department of Actuarial Mathematics and Statistics, Heriot-Watt University ( email )

Edinburgh Campus
Edinburgh, EH14 4AS
United Kingdom

HOME PAGE: http://garethpeters78.wixsite.com/garethwpeters

University College London - Department of Statistical Science ( email )

1-19 Torrington Place
London, WC1 7HB
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

University of Oxford Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre ( email )

Houghton St
London
United Kingdom

University of New South Wales (UNSW) - Faculty of Science ( email )

Australia

Jon Danielsson

London School of Economics - Systemic Risk Centre ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44.207.955.6056 (Phone)

HOME PAGE: http://www.riskreasearch.org

Jean-Pierre Zigrand

London School of Economics - Department of Finance, Systemic Risk Centre, and Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6201 (Phone)
+44 20 7955 7420 (Fax)

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