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Bessembinder, Hendrik; Hao, Jia; Zheng, Kuncheng
The Review of financial studies, 01/2020, Letnik: 33, Številka: 1Journal Article
We exploit a discontinuity in the New York Stock Exchange Designated Market Maker (DMM) contract to identify causal effects of DMM participation on equilibrium market outcomes. We document that contractual features that enhance DMM participation are associated with increased depth, narrower bid-ask spreads, and higher rates of price improvement, with most of the improvements attributable to increases in liquidity provision on markets other than the NYSE. These results cannot be attributed to the mechanical effects of the contractual changes and support the interpretation that market making is characterized by strategic complementarity.
