TY - JOUR
T1 - Liquidity Provision Contracts and Market Quality
T2 - Evidence from the New York Stock Exchange
AU - Bessembinder, Hendrik
AU - Hao, Jia
AU - Zheng, Kuncheng
N1 - Funding Information:
The authors thank Itay Goldstein, Adam Clark-Joseph, Kumar Venkataraman, Michael Goldstein, George Jiang, Ekkehart Boehmer, and Andriy Shkilko; two anonymous referees; and seminar participants at the Chinese University of Hong Kong, Hong Kong University of Science and Technology, Southern University of Science and Technology, the Chinese University of Hong Kong (Shenzhen), Cheung Kong Graduate School of Business, Northeastern University, Babson College, Stockholm Business School, the Norwegian School of Economics, the third Women in Microstructure conference, the 2018 ABFER conference, the 2018 FMA conference, and the 2017 China International Conference in Finance for insightful comments. This study was supported by a grant from the Research Grant Council of the Hong Kong Special Administrative Region, China [CUHK14501616]. Please send correspondence to Hendrik Bessembinder, Arizona State University, Department of Finance, W. P. Carey School of Business, P.O. Box 873906, Tempe, AZ 85287-3906; telephone: 480-965-1201. E-mail: hb@asu.edu.
Publisher Copyright:
© 2019 The Author(s) 2019. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com.
PY - 2020/1/1
Y1 - 2020/1/1
N2 - We exploit a discontinuity in the New York Stock Exchange Designated Market Maker (DMM) contract to identify causal effects of DMM participation on equilibrium market outcomes. We document that contractual features that enhance DMM participation are associated with increased depth, narrower bid-ask spreads, and higher rates of price improvement, with most of the improvements attributable to increases in liquidity provision on markets other than the NYSE. These results cannot be attributed to the mechanical effects of the contractual changes and support the interpretation that market making is characterized by strategic complementarity. Received October 7, 2017; editorial decision December 10, 2018 by Editor Itay Goldstein.
AB - We exploit a discontinuity in the New York Stock Exchange Designated Market Maker (DMM) contract to identify causal effects of DMM participation on equilibrium market outcomes. We document that contractual features that enhance DMM participation are associated with increased depth, narrower bid-ask spreads, and higher rates of price improvement, with most of the improvements attributable to increases in liquidity provision on markets other than the NYSE. These results cannot be attributed to the mechanical effects of the contractual changes and support the interpretation that market making is characterized by strategic complementarity. Received October 7, 2017; editorial decision December 10, 2018 by Editor Itay Goldstein.
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U2 - 10.1093/rfs/hhz040
DO - 10.1093/rfs/hhz040
M3 - Article
AN - SCOPUS:85082557480
SN - 0893-9454
VL - 33
SP - 44
EP - 74
JO - Review of Financial Studies
JF - Review of Financial Studies
IS - 1
ER -