Liquidity Provision Contracts and Market Quality: Evidence from the New York Stock Exchange
43 Pages Posted: 15 Jan 2017 Last revised: 7 Jun 2019
Date Written: March 1, 2019
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: Suggested Citation