Do market makers matter for price efficiency?—Evidence from China’s Sci-Tech Innovation Board

Market makers have traditionally been associated with improving liquidity, but their impact on price efficiency has been less clear, especially in today’s limit order book markets. This paper investigates the effect of market makers on price efficiency in today’s markets by utilizing a recent quasi-natural experiment on China’s Sci-Tech Innovation Board (STAR Market) following the introduction of a market maker mechanism. Employing the advanced staggered Difference-in-Differences (DiD) approach developed by Callaway and Sant (2021), we show that market makers significantly enhance short-term price efficiency by reducing autocorrelation and variance ratios. These findings are robust to various tests addressing potential bias caused by sample selection and model specification. Additionally, we explore the dynamic effects of market makers over time and across the staggered groups of stocks. Our analysis reveals that the effect persists throughout the testing period but is dominated by the first two groups of stocks that started to have market makers early. Furthermore, we examine the mechanisms through which market makers influence price efficiency and find that they primarily achieve this by facilitating the incorporation of public information and reducing noise trading. Limited evidence suggests that market makers increase the intensity of informed trading. These findings are supported by both channel and heterogeneity tests. Although the improvement in price efficiency is statistically significant, the effect’s magnitude is relatively modest. Finally, our results suggest that fostering competition among market makers and encouraging more high-capacity securities firms could further amplify the positive effects on price efficiency. Overall, these findings provide new insights into the evolving role of market makers in modern, electronic limit order book markets.