The Value of the Designated Market Maker

37 Pages Posted: 15 Feb 2006  

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Andy Waisburd

Texas Christian University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Abstract

The proliferation of electronic limit order books operating without dealers raises questions regarding the need for intermediaries with affirmative obligations to maintain markets. We develop a simple model of dealer participation and test it using a sample of less liquid firms that trade on the Paris Bourse. The results indicate that firms with designated dealers exhibit better market quality, and that younger firms, smaller firms, and less volatile firms choose a designated dealer. Around the announcement of dealer introduction, stocks experience an average cumulative abnormal return of nearly five percent that is positively correlated with improvements in liquidity. Overall, these findings emphasize the potential benefits of designing better market structures, even within electronic limit order books, and suggest that purely endogenous liquidity provision may not be optimal for all securities.

Keywords: Market Maker, Specialist, Exchange, Limit Order Book

Suggested Citation

Venkataraman, Kumar and Waisburd, Andy, The Value of the Designated Market Maker. Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=881585

Kumar Venkataraman (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

Andy Waisburd

Texas Christian University - Department of Finance ( email )

Fort Worth, TX 76129
United States

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