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Designated market makers still matter: Evidence from two natural experiments

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  • Clark-Joseph, Adam D.
  • Ye, Mao
  • Zi, Chao

Abstract

Independent technological glitches forced two separate trading halts on different U.S. exchanges during the week of July 6, 2015. During each halt, all other exchanges remained open. We exploit exogenous variation provided by this unprecedented coincidence, in conjunction with a proprietary data set, to identify the causal impact of Designated Market Maker (DMM) participation on liquidity. When the voluntary liquidity providers on one exchange were removed, liquidity remained unchanged; when DMMs were removed, liquidity decreased market-wide. We find evidence consistent with the idea that these DMMs, despite facing only mild formal obligations, significantly improve liquidity in the modern electronic marketplace.

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  • Clark-Joseph, Adam D. & Ye, Mao & Zi, Chao, 2017. "Designated market makers still matter: Evidence from two natural experiments," Journal of Financial Economics, Elsevier, vol. 126(3), pages 652-667.
    • Handle: RePEc:eee:jfinec:v:126:y:2017:i:3:p:652-667
    DOI: 10.1016/j.jfineco.2017.09.001
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    More about this item

    Keywords

    Market makers; HFTs; Liquidity; Obligations; Trading halt;
    All these keywords.

    JEL classification:

    • 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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