Designating market maker behaviour in limit order book markets

Efstathios Panayi, Gareth W. Peters, Jon Danielsson and Jean-Pierre Zigrand

Econometrics and Statistics, 2018, vol. 5, issue C, 20-44

Abstract: Financial exchanges provide incentives for limit order book (LOB) liquidity provision to certain market participants, termed designated market makers or designated sponsors. While quoting requirements typically enforce the activity of these participants for a certain portion of the day, an argument that liquidity demand throughout the trading day is far from uniformly distributed is made, and thus this liquidity provision may not be calibrated to the demand. Furthermore, it is propose that quoting obligations also include requirements about the speed of liquidity replenishment, and then a recommendation that use of the Threshold Exceedance Duration (TED) for this purpose be considered. To support this argument a comprehensive regression modelling approach using GLM and GAMLSS models to relate the TED to the state of the LOB and identify the regression structures that are best suited to modelling the TED is presented. Such an approach can be used by exchanges to set target levels of liquidity replenishment for designated market makers.

Keywords: Limit order book; Liquidity; Resilience; GLM; GAMLSS (search for similar items in EconPapers)
JEL-codes: C41 C52 D47 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Designating market maker behaviour in limit order book markets (2018)
Working Paper: Designating market maker behaviour in Limit Order Book markets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosta:v:5:y:2018:i:c:p:20-44

DOI: 10.1016/j.ecosta.2016.10.008

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