Market Liquidity and Competition among Designated Market Makers

109 Pages Posted: 18 Apr 2019 Last revised: 29 Nov 2021

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

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Darya Yuferova

Norwegian School of Economics (NHH) - Department of Finance

Date Written: November 23, 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 exogenous changes in the contract design lead to a significant decrease in quoted and effective spreads. Roughly four- fifth of the liquidity improvement is attributable to the exogenous increase in competition among DMMs, with the remainder stemming from the changes in financial incentives. Our analysis shows that competition among DMMs is another important aspect of contract design in addition to well-studied aspects such as rebates and requirements.

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, Market Liquidity and Competition among Designated Market Makers (November 23, 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

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Darya Yuferova

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

Helleveien 30
N-5045 Bergen
Norway

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