Designated Market Makers: Competition and Incentives

117 Pages Posted: 18 Apr 2019 Last revised: 9 Oct 2020

See all articles by Mario Bellia

Mario Bellia

European Union - JRC-Ispra, European Commision

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: August 20, 2020

Abstract

Do competition and incentives offered to designated market makers (DMMs) improve market liquidity? Using data from the 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 analysis shows that incentivizing DMMs might not necessary lead to an improvement of market liquidity unless exchanges induce greater competition among DMMs.

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 (August 20, 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

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
177
Abstract Views
1,442
rank
194,275
PlumX Metrics