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Which firms benefit from market making?

Y. Peter Chung (), S. Thomas Kim (), Kenji Kutsuna () and Richard L. Smith ()
Additional contact information
Y. Peter Chung: University of California
S. Thomas Kim: University of Tulsa
Kenji Kutsuna: Kobe University
Richard L. Smith: University of California

Financial Markets and Portfolio Management, 2020, vol. 34, issue 1, No 2, 33-63

Abstract: Abstract From 1998 until 2008, all firms on the JASDAQ exchange could choose and switch between a market-maker method similar to NASDAQ and a continuous auction method similar to NYSE for trading their shares. We find that selecting a more suitable trading method increases firm value. When low-liquidity firms switched to market making, their liquidity improved, while high-liquidity firms switched to auction despite modest but significant decreases in liquidity. The results suggest that though market making is costly, it is valuable for firms as long as the liquidity benefits are sufficient to justify the implicit intermediation fee.

Keywords: Market making; Continuous auction; Liquidity; JASDAQ (search for similar items in EconPapers)
JEL-codes: G02 G15 N25 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11408-020-00345-5

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