Paying for Market Liquidity: Competition and Incentives

60 Pages Posted: 18 Apr 2019

See all articles by Mario Bellia

Mario Bellia

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

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Jun Uno

Waseda University

Darya Yuferova

Norwegian School of Economics (NHH) - Department of Finance

Date Written: March 2019

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 adverse selection costs. 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 and for regulatory market oversight.

Keywords: High-Frequency Trading (HFT), Designated Market Makers (DMMs) Market Making, Adverse Selection, Liquidity Provision

JEL Classification: G12, G14

Suggested Citation

Bellia, Mario and Pelizzon, Loriana and Subrahmanyam, Marti G. and Uno, Jun and Yuferova, Darya, Paying for Market Liquidity: Competition and Incentives (March 2019). SAFE Working Paper No. 247. Available at SSRN: https://ssrn.com/abstract=3354400 or http://dx.doi.org/10.2139/ssrn.3354400

Mario Bellia

European Commission Joint Research Center - 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

Goethe University Frankfurt - Research Center 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)

Jun Uno

Waseda University ( email )

1-6-1 Nishi-Waseda
Shinjuku-ku
Tokyo, 1698050
Japan

Darya Yuferova

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

Helleveien 30
N-5045 Bergen
Norway

Register to save articles to
your library

Register

Paper statistics

Downloads
65
rank
339,043
Abstract Views
341
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information