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Market conditions, fragility, and the economics of market making

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  • Anand, Amber
  • Venkataraman, Kumar

Abstract

Using audit-trail data from the Toronto Stock Exchange, we find that market makers scale back in unison when market conditions are unfavorable, which contributes to covariation in liquidity supply, both within and across stocks. Market conditions lower aggregate participation via their impact on trading profits and risk. Contrary to regulatory view, higher stock volatility is associated with more participation and higher profits, even after controlling for other market conditions, including stock volume. Fragility concerns extend to larger stocks and to active participants. The designated market maker mitigates periodic illiquidity created by synchronous withdrawal of market makers in large and small stocks.

Suggested Citation

  • Anand, Amber & Venkataraman, Kumar, 2016. "Market conditions, fragility, and the economics of market making," Journal of Financial Economics, Elsevier, vol. 121(2), pages 327-349.
  • Handle: RePEc:eee:jfinec:v:121:y:2016:i:2:p:327-349
    DOI: 10.1016/j.jfineco.2016.03.006
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    References listed on IDEAS

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    1. repec:eee:jfinec:v:126:y:2017:i:3:p:652-667 is not listed on IDEAS
    2. repec:eee:pacfin:v:49:y:2018:i:c:p:103-128 is not listed on IDEAS
    3. repec:eee:jfinec:v:128:y:2018:i:2:p:253-265 is not listed on IDEAS
    4. Theissen, Erik & Westheide, Christian, 2017. "Call of duty: Designated market maker participation in call auctions," CFR Working Papers 16-05, University of Cologne, Centre for Financial Research (CFR).

    More about this item

    Keywords

    Market makers; HFTs; Fragility; Volatility; Obligations;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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