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

45 Pages Posted: 15 Jan 2017 Last revised: 9 Oct 2017

Hendrik Bessembinder

Arizona State University

Jia Hao

CUHK Business School, The Chinese University of Hong Kong; University of Michigan at Ann Arbor - Ross School of Business

Kuncheng (K.C.) Zheng

Northeastern University - D’Amore-McKim School of Business

Date Written: October 1, 2017

Abstract

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

Bessembinder, Hendrik and Hao, Jia and Zheng, Kuncheng (K.C.), Liquidity Provision Contracts and Market Quality: Evidence from the New York Stock Exchange (October 1, 2017). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2899147. Available at SSRN: https://ssrn.com/abstract=2899147

Hendrik Bessembinder

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
United States

Jia Hao (Contact Author)

CUHK Business School, The Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong
852-3943-1914 (Phone)

HOME PAGE: http://www.bschool.cuhk.edu.hk/index.php/faculty-staff/show-alltest?pid=2&sid=1226:HAO-Jia

University of Michigan at Ann Arbor - Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-1690 (Phone)

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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