Designating market maker behaviour in limit order book markets

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

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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; bookLiquidityResilienceGLMGAMLSS (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2018-01-01
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (2)

Published in Econometrics and Statistics, 1, January, 2018, 5, pp. 20-44. ISSN: 2452-3062

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http://eprints.lse.ac.uk/90424/ Open access version. (application/pdf)

Related works:
Journal Article: 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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