TY - JOUR
T1 - Designated market makers still matter
T2 - Evidence from two natural experiments
AU - Clark-Joseph, Adam D.
AU - Ye, Mao
AU - Zi, Chao
N1 - Funding Information:
We are grateful for helpful comments from an anonymous referee, Amber Anand, Jim Angel, Hank Bessembinder (WFA discussant), Robert Battalio (discussant at Wabash River Conference), Colin Clark, Huseyin Gulen, Craig Holden, Neil Pearson, Steven Poser, Paul Schutz, Jeff Smith, Kumar Venkataraman, Dan Weaver as well as conference participants at the Western Finance Association Annual Conference and Wabash River Conference. Mao Ye acknowledges the support by National Science Foundation Grant 1352936 (joint with the Office of Financial Research at U.S. Department of the Treasury). This work also uses the Extreme Science and Engineering Discovery Environment (XSEDE), which is supported by National Science Foundation Grant number OCI-1053575 . We thank David O’Neal for his assistance with supercomputing, supported by the XSEDE Extended Collaborative Support Service program. All errors are our own.
Publisher Copyright:
© 2017
PY - 2017/12
Y1 - 2017/12
N2 - 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.
AB - 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.
KW - HFTs
KW - Liquidity
KW - Market makers
KW - Obligations
KW - Trading halt
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U2 - 10.1016/j.jfineco.2017.09.001
DO - 10.1016/j.jfineco.2017.09.001
M3 - Article
AN - SCOPUS:85030480081
SN - 0304-405X
VL - 126
SP - 652
EP - 667
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 3
ER -