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Designated Market Makers: 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 the 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 analysis shows that incentivizing DMMs might not necessary lead to an improvement of market liquidity unless exchanges induce greater competition among DMMs.

Keywords: Designated Market Makers; DMMs; Liquidity Provision (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2020, Revised 2020
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-mst and nep-reg
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Citations: View citations in EconPapers (1)

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DOI: 10.2139/ssrn.3354400

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