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Designating market maker behaviour in limit order book markets

Author

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  • Panayi, Efstathios
  • Peters, Gareth W.
  • Danielsson, Jon
  • Zigrand, Jean-Pierre

Abstract

Financial exchanges provide incentives for limit order book (LOB) liquidity provision to certain market participants, termed designated market makers or designated sponsors. While quoting requirements typically enforce the activity of these participants for a certain portion of the day, an argument that liquidity demand throughout the trading day is far from uniformly distributed is made, and thus this liquidity provision may not be calibrated to the demand. Furthermore, it is propose that quoting obligations also include requirements about the speed of liquidity replenishment, and then a recommendation that use of the Threshold Exceedance Duration (TED) for this purpose be considered. To support this argument a comprehensive regression modelling approach using GLM and GAMLSS models to relate the TED to the state of the LOB and identify the regression structures that are best suited to modelling the TED is presented. Such an approach can be used by exchanges to set target levels of liquidity replenishment for designated market makers.

Suggested Citation

  • Panayi, Efstathios & Peters, Gareth W. & Danielsson, Jon & Zigrand, Jean-Pierre, 2018. "Designating market maker behaviour in limit order book markets," Econometrics and Statistics, Elsevier, vol. 5(C), pages 20-44.
    • Handle: RePEc:eee:ecosta:v:5:y:2018:i:c:p:20-44
    DOI: 10.1016/j.ecosta.2016.10.008
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    Cited by:

    1. Pelizzon, Loriana & Sagade, Satchit & Vozian, Katia, 2020. "Resiliency: Cross-venue dynamics with Hawkes processes," SAFE Working Paper Series 291, Leibniz Institute for Financial Research SAFE.
    2. Clapham, Benjamin & Gomber, Peter & Lausen, Jens & Panz, Sven, 2018. "Liquidity provider incentives in fragmented securities markets," SAFE Working Paper Series 231, Leibniz Institute for Financial Research SAFE.

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    More about this item

    Keywords

    Limit order book; Liquidity; Resilience; GLM; GAMLSS;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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