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Market makers as information providers: The natural experiment of STAR

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Author Info

  • Perotti, Pietro
  • Rindi, Barbara

Abstract

Market makers are financial intermediaries who are supposed to provide additional liquidity, but do not have any information-related obligation. This paper studies the unique case of the Italian Stock Exchange, where market makers are also obliged to facilitate information disclosure about the firms they cover. We focus on a group of small/medium capitalization stocks (STAR) that are assigned a designated market maker (DMM) starting from 2001. We show that their liquidity requirements are not binding during the sample periods and that the main impact of DMMs' introduction is due to their obligations on information provision. We find that DMMs' activity as information providers reduces spread and price volatility, the probability of informed trading (PIN), and the adverse selection component of the spread. An event study provides evidence that the information released through DMMs is perceived as useful by market participants.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 17 (2010)
Issue (Month): 5 (December)
Pages: 895-917

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Handle: RePEc:eee:empfin:v:17:y:2010:i:5:p:895-917

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Designated market makers Information disclosure Limit order books Market quality Information asymmetries;

References

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Cited by:
  1. 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.

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