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Paying for market liquidity: Competition and incentives

Mario Bellia, Loriana Pelizzon (), Marti G. Subrahmanyam and Darya Yuferova

No 247, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: Do competition and incentives offered to designated market makers (DMMs) improve market liquidity? Using data from NYSE Euronext Paris, we show that an exogenous increase in competition among DMMs leads to a significant decrease in quoted and effective spreads, mainly through a reduction in the realized spread. In contrast, changes in incentives, through small changes in rebates and requirements for DMMs, do not have any tangible effect on market liquidity. Our results are of relevance for designing optimal contracts between exchanges and DMMs, as well as for regulatory market oversight.

Keywords: Designated Market Makers (DMMs); Liquidity Provision (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-mst and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:247

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