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Why do firms pay for liquidity provision in limit order markets?

Author

Listed:
  • Johannes A. Skjeltorp

    (Norges Bank (Central Bank of Norway))

  • Bernt Arne Ødegaard

    (University of Stavanger and Norges Bank (Central Bank of Norway))

Abstract

In recent years, a number of electronic limit order markets have reintroduced market makers for some securities (Designated Market Makers). This trend has mainly been initiated by financial intermediaries and listed firms themselves, without any regulatory pressure. In this paper we ask why firms are willing to pay to improve the secondary market liquidity of their shares. We show that a contributing factor in this decision is the likelihood that the firm will interact with the capital markets in the near future, either because they have capital needs, or that they are planning to repurchase shares. We also find some evidence of agency costs associated with the initiation of a market maker agreement as the probability of observing insider trades increases when liquidity improves.

Suggested Citation

  • Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2010. "Why do firms pay for liquidity provision in limit order markets?," Working Paper 2010/12, Norges Bank.
    • Handle: RePEc:bno:worpap:2010_12
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    File URL: https://www.norges-bank.no/en/news-events/news-publications/Papers/Working-Papers/2010/WP-201012/
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    References listed on IDEAS

    as
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    Cited by:

    1. Benos, Evangelos & Wetherilt, Anne, 2012. "The role of designated market makers in the new trading landscape," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 343-353.
    2. Rakkestad, Ketil & Skjeltorp, Johannes & Ødegaard, Bernt Arne, 2012. "The liquidity of the Secondary Market for Debt Securities in Norway," UiS Working Papers in Economics and Finance 2012/12, University of Stavanger.

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    More about this item

    Keywords

    Market liquidity; Corporate Finance; Designated Market Makers; Insider trading;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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