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

42 Pages Posted: 15 Jan 2017 Last revised: 11 Aug 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: June 01, 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 effect of more binding DMM obligations on market quality. We show that more stringent market-making requirements are associated with increased depth, narrower bid-ask spreads, increased firm value, and improved price efficiency. These results cannot be attributed to the mechanical effects of more binding DMM obligations, and contribute to the growing body of evidence that the functioning of limit order markets can be improved by contracts that commit one or more participants to provide liquidity.

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 (June 01, 2017). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2899147. Available at SSRN: https://ssrn.com/abstract=2899147

Hendrik (Hank) 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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