Paying for market liquidity : competition and incentives

  • 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.

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Author:Mario Bellia, Loriana PelizzonORCiDGND, Marti G. Subrahmanyam, Jun Uno, Darya Yuferova
Parent Title (English):SAFE working paper series ; No. 247
Series (Serial Number):SAFE working paper series (247)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2019
Year of first Publication:2019
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2019/03/21
Tag:Adverse Selection; Designated Market Makers (DMMs) Market Making; High-Frequency Trading (HFT); Liquidity Provision
Issue:February 2019
Page Number:60
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht