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One for the money, two for the show? The number of designated market makers and liquidity

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  • Theissen, Erik
  • Westheide, Christian

Abstract

Prior research has established that the presence of designated market makers (DMMs) in an electronic open limit order book increases liquidity. We analyze whether the presence of additional DMMs results in a further improvement in liquidity. Using data from Deutsche Börse's Xetra system we find that increases in the number of DMMs significantly improve liquidity, and vice versa for decreases in the number of DMMs. Our results are confirmed when we use an instrumental variables approach to overcome potential endogeneity issues.

Suggested Citation

  • Theissen, Erik & Westheide, Christian, 2022. "One for the money, two for the show? The number of designated market makers and liquidity," CFR Working Papers 22-10, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:2210
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    References listed on IDEAS

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    1. John Rust & George Hall, 2003. "Middlemen versus Market Makers: A Theory of Competitive Exchange," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 353-403, April.
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    More about this item

    Keywords

    Designated market makers; Liquidity;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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