IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v55y2023ipas1544612323002817.html
   My bibliography  Save this article

Does the introduction of market maker improve market quality? Evidence from China's Sci-Tech innovation board

Author

Listed:
  • Li, Jianhua
  • Xu, Jianxiang

Abstract

The design of the inherent mechanism of financial markets has always been an important issue in market microstructure. Based on the introduction of the market maker trading system on China's Sci-Tech Innovation Board (STAR Market), this study uses the staggered difference-in-differences method and selects data from STAR Market to test whether the introduction of the market maker system improves market quality. We find that introducing the market maker system improves market quality, with increased liquidity and decreased volatility in STAR Market stocks. Our study has great practical significance for constructing and developing capital market microstructure worldwide, especially in emerging markets.

Suggested Citation

  • Li, Jianhua & Xu, Jianxiang, 2023. "Does the introduction of market maker improve market quality? Evidence from China's Sci-Tech innovation board," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002817
    DOI: 10.1016/j.frl.2023.103909
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612323002817
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2023.103909?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Garbade, Kenneth D & Silber, William L, 1979. "Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk," Journal of Finance, American Finance Association, vol. 34(3), pages 577-593, June.
    2. Christie, William G & Schultz, Paul H, 1994. "Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1813-1840, December.
    3. Clément de Chaisemartin & Xavier D'Haultfœuille, 2020. "Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects," American Economic Review, American Economic Association, vol. 110(9), pages 2964-2996, September.
    4. Ole E. Barndorff-Nielsen & Neil Shephard, 2006. "Econometrics of Testing for Jumps in Financial Economics Using Bipower Variation," Journal of Financial Econometrics, Oxford University Press, vol. 4(1), pages 1-30.
    5. Rehse, Dominik & Riordan, Ryan & Rottke, Nico & Zietz, Joachim, 2019. "The effects of uncertainty on market liquidity: Evidence from Hurricane Sandy," Journal of Financial Economics, Elsevier, vol. 134(2), pages 318-332.
    6. repec:bla:jfinan:v:43:y:1988:i:3:p:617-37 is not listed on IDEAS
    7. Wahal, Sunil, 1997. "Entry, Exit, Market Makers, and the Bid-Ask Spread," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 871-901.
    8. Hasabrouck, Joel & Sofianos, George, 1993. "The Trades of Market Makers: An Empirical Analysis of NYSE Specialists," Journal of Finance, American Finance Association, vol. 48(5), pages 1565-1593, December.
    9. Chung, Kee H. & Chuwonganant, Chairat, 2018. "Market volatility and stock returns: The role of liquidity providers," Journal of Financial Markets, Elsevier, vol. 37(C), pages 17-34.
    10. Bing, Tao & Cui, Yian & Min, Ying & Xiong, Xiong, 2022. "Price limit changes and market quality: Evidence from China," Finance Research Letters, Elsevier, vol. 48(C).
    11. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
    12. O'Hara, Maureen & Oldfield, George S., 1986. "The Microeconomics of Market Making," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 361-376, December.
    13. Clark-Joseph, Adam D. & Ye, Mao & Zi, Chao, 2017. "Designated market makers still matter: Evidence from two natural experiments," Journal of Financial Economics, Elsevier, vol. 126(3), pages 652-667.
    14. Goodman-Bacon, Andrew, 2021. "Difference-in-differences with variation in treatment timing," Journal of Econometrics, Elsevier, vol. 225(2), pages 254-277.
    15. Perotti, Pietro & Rindi, Barbara, 2010. "Market makers as information providers: The natural experiment of STAR," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 895-917, December.
    16. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
    17. Bondarenko, Oleg, 2001. "Competing market makers, liquidity provision, and bid-ask spreads," Journal of Financial Markets, Elsevier, vol. 4(3), pages 269-308, June.
    18. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(1), pages 33-53.
    19. Zhang, Xiaotao & Wang, Ziqiao & Hao, Jing & He, Feng, 2022. "Price limit and stock market quality: Evidence from a quasi-natural experiment in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    20. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    21. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    22. Baker, Andrew C. & Larcker, David F. & Wang, Charles C.Y., 2022. "How much should we trust staggered difference-in-differences estimates?," Journal of Financial Economics, Elsevier, vol. 144(2), pages 370-395.
    23. Callaway, Brantly & Sant’Anna, Pedro H.C., 2021. "Difference-in-Differences with multiple time periods," Journal of Econometrics, Elsevier, vol. 225(2), pages 200-230.
    24. Yang Gao & Chengjie Zhao & Bianxia Sun & Wandi Zhao, 2022. "Effects of investor sentiment on stock volatility: new evidences from multi-source data in China’s green stock markets," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-30, December.
    25. Zhang, Wei & Huang, Ke & Feng, Xu & Zhang, Yongjie, 2017. "Market maker competition and price efficiency: Evidence from China," Economic Modelling, Elsevier, vol. 66(C), pages 121-131.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2013, January-A.
    2. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4, July-Dece.
    3. Gehrig, Thomas & Jackson, Matthew, 1998. "Bid-ask spreads with indirect competition among specialists," Journal of Financial Markets, Elsevier, vol. 1(1), pages 89-119, April.
    4. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    5. Degryse, H.A., 2007. "Competition on financial markets : Does market design matter?," Other publications TiSEM ee5530b2-34f7-4d95-ad62-f, Tilburg University, School of Economics and Management.
    6. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    7. Rik Chakraborti & Gavin Roberts, 2023. "How price-gouging regulation undermined COVID-19 mitigation: county-level evidence of unintended consequences," Public Choice, Springer, vol. 196(1), pages 51-83, July.
    8. Mikhail Mamonov & Anna Pestova & Steven Ongena, 2023. "“Crime and Punishment”? How Banks Anticipate and Propagate Global Financial Sanctions," CERGE-EI Working Papers wp753, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    9. Goldstein, Michael A. & Namin, Elmira Shekari, 2023. "Corporate bond liquidity and yield spreads: A review," Research in International Business and Finance, Elsevier, vol. 65(C).
    10. Asatryan, Zareh & Baskaran, Thushyanthan & Birkholz, Carlo & Hufschmidt, Patrick, 2023. "Favoritism by the governing elite," Ruhr Economic Papers 1029, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    11. Chen, Jidong & Shi, Xinzheng & Zhang, Ming-ang & Zhang, Sihan, 2024. "Centralization of environmental administration and air pollution: Evidence from China," Journal of Environmental Economics and Management, Elsevier, vol. 126(C).
    12. Cl'ement de Chaisemartin & Xavier D'Haultf{oe}uille, 2021. "Two-Way Fixed Effects and Differences-in-Differences with Heterogeneous Treatment Effects: A Survey," Papers 2112.04565, arXiv.org, revised Jun 2022.
    13. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity -- Theory and Empirical Evidence," NBER Working Papers 18251, National Bureau of Economic Research, Inc.
    14. Davidson, Carl & Heyman, Fredrik & Matusz, Steven & Sjöholm, Fredrik & Chun Zhu, Susan, 2022. "How International Experience Helps Shape Labor Market Outcomes," Working Paper Series 1453, Research Institute of Industrial Economics, revised 09 Jun 2024.
    15. Marcus Roller, Daniel Steinberg, 2023. "Differences-in-Differences with multiple Treatments under Control," Diskussionsschriften credresearchpaper41, Universitaet Bern, Departement Volkswirtschaft - CRED.
    16. Melnik, Walter & Smyth, Andrew, 2024. "R&D tax credits and innovation," Journal of Public Economics, Elsevier, vol. 236(C).
    17. Luca Coraggio & Marco Pagano & Annalisa Scognamiglio & Joacim Tåg, 2022. "JAQ of All Trades: Job Mismatch, Firm Productivity and Managerial Quality," EIEF Working Papers Series 2205, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2022.
    18. Mao, Wen & Pagano, Michael S., 2011. "Specialists as risk managers: The competition between intermediated and non-intermediated markets," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 51-66, January.
    19. Flepp, Raphael & Nüesch, Stephan & Franck, Egon, 2017. "The liquidity advantage of the quote-driven market: Evidence from the betting industry," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 306-317.
    20. Wei-Fong Pan, 2023. "Does a firm’s lobbying activity respond to its peers’ lobbying activity?," Public Choice, Springer, vol. 194(3), pages 297-324, March.

    More about this item

    Keywords

    Market microstructure; Market maker trading system; Market quality; Sci-Tech innovation board;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002817. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.