Designated Market Makers Still Matter: Evidence from Two Natural Experiments
36 Pages Posted: 4 Jun 2016 Last revised: 16 Nov 2016
Date Written: October 14, 2016
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: Suggested Citation