Liquidity Provision Contracts and Market Quality: Evidence from the New York Stock Exchange
42 Pages
Posted: 15 Jan 2017
Last revised: 5 Jun 2017
Arizona State University
CUHK Business School, The Chinese University of Hong Kong; University of Michigan at Ann Arbor - Ross School of Business
Northeastern University - D’Amore-McKim School of Business
Date Written: January 13, 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:
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 (January 13, 2017). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2899147. Available at SSRN: https://ssrn.com/abstract=2899147
