Designated Market Makers: Competition and Incentives

108 Pages Posted: 18 Apr 2019 Last revised: 31 Mar 2020

See all articles by Mario Bellia

Mario Bellia

European Union - JRC-Ispra, European Commision; Goethe University Frankfurt - Research Center SAFE

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Darya Yuferova

Norwegian School of Economics (NHH) - Department of Finance

Date Written: March 30, 2020

Abstract

Do competition and incentives offered to designated market makers (DMMs) improve market liquidity? Using data from NYSE Euronext Paris, we show that an exogenous increase in competition among DMMs leads to a significant decrease in quoted and effective spreads, mainly through a reduction in the realized spread. In contrast, changes in incentives, through small changes in rebates and requirements for DMMs, do not have any tangible effect on market liquidity. Our results are of relevance for designing optimal contracts between exchanges and DMMs, as well as for regulatory market oversight.

Keywords: Designated Market Makers (DMMs), Liquidity Provision

JEL Classification: G12, G14

Suggested Citation

Bellia, Mario and Pelizzon, Loriana and Subrahmanyam, Marti G. and Yuferova, Darya, Designated Market Makers: Competition and Incentives (March 30, 2020). SAFE Working Paper No. 247; Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC; NYU Stern School of Business. Available at SSRN: https://ssrn.com/abstract=3354400 or http://dx.doi.org/10.2139/ssrn.3354400

Mario Bellia

European Union - JRC-Ispra, European Commision ( email )

Via Enrico Fermi 2749, Ispra, VA
Ispra (VA), 21027
Italy

Goethe University Frankfurt - Research Center SAFE ( email )

Frankfurt am Main
Germany

HOME PAGE: http://safe-frankfurt.de/

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

Darya Yuferova

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
144
Abstract Views
877
rank
212,515
PlumX Metrics