Liquidity Provision Contracts and Market Quality: Evidence from the New York Stock Exchange
45 Pages Posted: 15 Jan 2017 Last revised: 9 Oct 2017
Date Written: October 1, 2017
We exploit a discontinuity in the contractual obligations of Designated Market Maker (DMM) firms on the New York Stock Exchange (NYSE) to identify the causal effects of DMM obligations on market quality. We document that more stringent DMM requirements are associated with increased depth, narrower bid-ask spreads, higher rates of price improvement, increased firm value, and improved price efficiency, with many of the improvements attributable to increases in liquidity provision on markets other than the NYSE. These results cannot be attributed the mechanical effects of more binding DMM obligations, and support that market making is characterized by strategic complementarity.
Keywords: Designated Market Maker, Firm Value, Market Quality, Regression Discontinuity
JEL Classification: D40, G10, G20
Suggested Citation: Suggested Citation