Liquidity Provision Contracts and Market Quality: Evidence from the New York Stock Exchange

43 Pages Posted: 15 Jan 2017 Last revised: 7 Jun 2019

See all articles by Hendrik Bessembinder

Hendrik Bessembinder

Arizona State University

Jia Hao

Babson College

Kuncheng (K.C.) Zheng

Northeastern University - D’Amore-McKim School of Business

Date Written: March 1, 2019

Abstract

We exploit a discontinuity in the New York Stock Exchange Designated Market Maker (DMM) contract to identify causal effects of DMM participation on equilibrium market outcomes. We document that contractual features that enhance DMM participation are associated with increased depth, narrower bid-ask spreads, and higher rates of price improvement, with most of the improvements attributable to increases in liquidity provision on markets other than the NYSE. These results cannot be attributed to the mechanical effects of the contractual changes and support the interpretation that market making is characterized by strategic complementarity.

Keywords: Designated Market Maker, Firm Value, Market Quality, Regression Discontinuity

JEL Classification: G10, G12, G19, G29

Suggested Citation

Bessembinder, Hendrik (Hank) and Hao, Jia and Zheng, Kuncheng (K.C.), Liquidity Provision Contracts and Market Quality: Evidence from the New York Stock Exchange (March 1, 2019). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2899147. Available at SSRN: https://ssrn.com/abstract=2899147 or http://dx.doi.org/10.2139/ssrn.2899147

Hendrik (Hank) Bessembinder (Contact Author)

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
United States

Jia Hao

Babson College ( email )

Babson Park, MA 02457-0310
United States

Kuncheng (K.C.) Zheng

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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