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Designated Market Makers Still Matter: Evidence from Two Natural Experiments

36 Pages Posted: 4 Jun 2016 Last revised: 16 Nov 2016

Adam D. Clark-Joseph

University of Illinois at Urbana-Champaign

Mao Ye

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Chao Zi

University of Illinois at Urbana-Champaign

Multiple version iconThere are 2 versions of this paper

Date Written: October 14, 2016

Abstract

Independent technological glitches forced two separate trading halts on different exchanges during the week of July 6, 2015. During each halt, all other exchanges remained open. We exploit exogenous variation provided by this unprecedented coincidence, in conjunction with a novel proprietary dataset, to identify the causal impact of Designated Market Maker (DMM) participation on liquidity. Whereas removing the voluntary liquidity providers on one exchange has negligible effects, removing DMMs substantially reduces liquidity market-wide. Contrary to conventional wisdom, we find that DMMs — liquidity providers with formal obligations — significantly improve liquidity in the modern electronic marketplace. Seemingly tiny obligations elicit enormous effects.

Keywords: Designated Market Makers, Liquidity, High-Frequency Trading

JEL Classification: C55, C58, G12, G14

Suggested Citation

Clark-Joseph, Adam D. and Ye, Mao and Zi, Chao, Designated Market Makers Still Matter: Evidence from Two Natural Experiments (October 14, 2016). Journal of Financial Economics (JFE), Forthcoming; Paris December 2016 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2788188 or http://dx.doi.org/10.2139/ssrn.2788188

Adam D. Clark-Joseph

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Mao Ye (Contact Author)

University of Illinois at Urbana-Champaign ( email )

406 Wohlers
1206 South 6th Street
Champaign, IL 61820
United States
2172440474 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chao Zi

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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