Designated Market Makers Still Matter: Evidence from Two Natural Experiments

36 Pages Posted: 1 Aug 2016 Last revised: 20 Oct 2016

See all articles by Adam D. Clark-Joseph

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

Abstract

Independent technological glitches forced two separate trading halts on different U.S. 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 proprietary dataset, to identify the causal impact of Designated Market Maker (DMM) participation on liquidity. When the voluntary liquidity providers on one exchange were removed, liquidity remained unchanged; when DMMs were removed, liquidity decreased market-wide. We find evidence consistent with the idea that these DMMs, despite facing only mild formal obligations, significantly improve liquidity in the modern electronic marketplace.

Keywords: Market Makers, HFTs, Liquidity, Obligations, Trading halt

JEL Classification: G10, G20

Suggested Citation

Clark-Joseph, Adam D. and Ye, Mao and Zi, Chao, Designated Market Makers Still Matter: Evidence from Two Natural Experiments. Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2816425 or http://dx.doi.org/10.2139/ssrn.2816425

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 )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://czi.finance

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