Liquidity Provision Contracts and Market Quality: Evidence from the New York Stock Exchange

Hendrik Bessembinder, Jia Hao, Kuncheng Zheng

Research output: Contribution to journalArticle

1 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)44-74
Number of pages31
JournalAmerican Historical Review
Volume124
Issue number2
DOIs
StatePublished - Apr 1 2019

ASJC Scopus subject areas

  • History
  • Archaeology
  • Museology

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