Market Liquidity and Competition among Designated Market Makers
109 Pages Posted: 18 Apr 2019 Last revised: 29 Nov 2021
Date Written: November 23, 2020
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: Suggested Citation