Designating Market Maker Behaviour in Limit Order Book Markets
36 Pages Posted: 19 Aug 2015
Date Written: August 18, 2015
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: Suggested Citation