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Designated Market Makers: Competition and Incentives

Author

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  • Bellia, Mario
  • Pelizzon, Loriana
  • Subrahmanyam, Marti G.
  • Yuferova, Darya

Abstract

Do competition and incentives offered to designated market makers (DMMs) improve market liquidity? Using data from the 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 the realized spread. In contrast, changes in incentives, through small changes in rebates and requirements for DMMs, do not have any tangible effect on market liquidity. Our analysis shows that incentivizing DMMs might not necessary lead to an improvement of market liquidity unless exchanges induce greater competition among DMMs.

Suggested Citation

  • Bellia, Mario & Pelizzon, Loriana & Subrahmanyam, Marti G. & Yuferova, Darya, 2020. "Designated Market Makers: Competition and Incentives," SAFE Working Paper Series 247, Leibniz Institute for Financial Research SAFE, revised 2020.
    • Handle: RePEc:zbw:safewp:247
    DOI: 10.2139/ssrn.3354400
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    References listed on IDEAS

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    Cited by:

    1. Qiu, Zhigang & Wang, Yanyi & Zhang, Shunming, 2023. "Market power, ambiguity, and market participation," Journal of Financial Markets, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    Designated Market Makers; DMMs; Liquidity Provision;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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