IDEAS home Printed from https://ideas.repec.org/p/ysm/somwrk/ysm443.html
   My bibliography  Save this paper

The Role of the Market Maker in International Capital Markets: Challenges and Benefits of Implementation in Emerging Markets

Author

Listed:
  • Marios Panayides

    () (International Center for Finance, Yale University)

  • Andreas Charitou

    () (Department of Business Administration, University of Cyprus)

Abstract

Different forms of market making systems can be found in most developed capital markets. These markets, instead of having a pure electronic limit order book design, follow one of three forms of market making: 1) a quote-driven market making system, 2)a centralized market making system in an order-driven market, and 3) a non-centralized market making system in an order-driven market. This paper analyzes and critically evaluates each system, especially in relation to the application of these designs in emerging capital markets. These countries, in an effort to restructure their market design into a more efficient and attractive venue for international investors, are required to adopt one of the three market making systems found mainly in developed countries. In this study we provide guidance to emerging market regulators for implementing a market making system and prescribe the factors that should be taken into consideration when redesigning their trading system. The challenges and benefits of such an application are set forward along with possible alternatives.

Suggested Citation

  • Marios Panayides & Andreas Charitou, 2004. "The Role of the Market Maker in International Capital Markets: Challenges and Benefits of Implementation in Emerging Markets," Yale School of Management Working Papers ysm443, Yale School of Management.
  • Handle: RePEc:ysm:somwrk:ysm443
    as

    Download full text from publisher

    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=513949
    Download Restriction: no

    References listed on IDEAS

    as
    1. Scott Weisbenner & Zoran Ivkovich, 2003. "Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments," NBER Working Papers 9685, National Bureau of Economic Research, Inc.
    2. Jack L. Knetsch & J. A. Sinden, 1984. "Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value," The Quarterly Journal of Economics, Oxford University Press, vol. 99(3), pages 507-521.
    3. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
    4. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-533, October.
    5. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1989. "The Revenues-Expenditures Nexus: Evidence from Local Government Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 415-429, May.
    6. Andrew Ang & Angela Maddaloni, 2005. "Do Demographic Changes Affect Risk Premiums? Evidence from International Data," The Journal of Business, University of Chicago Press, vol. 78(1), pages 341-380, January.
    7. Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December.
    8. Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-167, March.
    9. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
    10. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    11. Mark Grinblatt, 2001. "What Makes Investors Trade?," Journal of Finance, American Finance Association, vol. 56(2), pages 589-616, April.
    12. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    13. Mikhael Shor, 2003. "Learning to Respond: The Use of Heuristics in Dynamic Games," Game Theory and Information 0301001, EconWPA.
    14. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    15. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
    16. Cumby, Robert E. & Modest, David M., 1987. "Testing for market timing ability : A framework for forecast evaluation," Journal of Financial Economics, Elsevier, vol. 19(1), pages 169-189, September.
    17. Alok Kumar & William N. Goetzmann, 2003. "Diversification Decisions of Individual Investors and Asset Prices," Yale School of Management Working Papers ysm441, Yale School of Management.
    18. Don L. Coursey & John L. Hovis & William D. Schulze, 1987. "The Disparity Between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 679-690.
    19. Becker, Connie & Ferson, Wayne & Myers, David H. & Schill, Michael J., 1999. "Conditional market timing with benchmark investors," Journal of Financial Economics, Elsevier, vol. 52(1), pages 119-148, April.
    20. Chance, Don M. & Hemler, Michael L., 2001. "The performance of professional market timers: daily evidence from executed strategies," Journal of Financial Economics, Elsevier, vol. 62(2), pages 377-411, November.
    21. Ravi Dhar & Ning Zhu, 2002. "Up Close and Personal: An Individual Level Analysis of the Disposition Effect," Yale School of Management Working Papers ysm269, Yale School of Management, revised 01 Sep 2009.
    22. Erev, Ido & Roth, Alvin E, 1998. "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria," American Economic Review, American Economic Association, vol. 88(4), pages 848-881, September.
    23. Graham, John R. & Harvey, Campbell R., 1996. "Market timing ability and volatility implied in investment newsletters' asset allocation recommendations," Journal of Financial Economics, Elsevier, vol. 42(3), pages 397-421, November.
    24. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-680.
    25. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
    26. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, Oxford University Press, pages 41-71.
    27. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 261-292.
    28. Brad M. Barber & Terrance Odean, 2002. "Online Investors: Do the Slow Die First?," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 455-488, March.
    29. JOSHUA D. COVAL & David Hirshleifer & TYLER G. SHUMWAY, 2004. "Can Individual Investors Beat the Market?," Finance 0412005, EconWPA.
    30. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    31. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, vol. 56(5), pages 1747-1764, October.
    32. Amit Seru & Tyler Shumway & Noah Stoffman, 2010. "Learning by Trading," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 705-739, February.
    33. Merton, Robert C, 1981. "On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts," The Journal of Business, University of Chicago Press, vol. 54(3), pages 363-406, July.
    34. Hartzmark, Michael L, 1991. "Luck versus Forecast Ability: Determinants of Trader Performance in Futures Markets," The Journal of Business, University of Chicago Press, vol. 64(1), pages 49-74, January.
    35. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
    36. Jagannathan, Ravi & Korajczyk, Robert A, 1986. "Assessing the Market Timing Performance of Managed Portfolios," The Journal of Business, University of Chicago Press, vol. 59(2), pages 217-235, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kubota, Keiichi & Takehara, Hitoshi, 2009. "Information based trade, the PIN variable, and portfolio style differences: Evidence from Tokyo stock exchange firms," Pacific-Basin Finance Journal, Elsevier, vol. 17(3), pages 319-337, June.
    2. Anand, Amber & Tanggaard, Carsten & Weaver, Daniel G., 2005. "Paying for Market Quality," Finance Research Group Working Papers F-2006-06, University of Aarhus, Aarhus School of Business, Department of Business Studies.

    More about this item

    Keywords

    Emerging Capital Markets;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ysm:somwrk:ysm443. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/smyalus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.