Designated market makers still matter: Evidence from two natural experiments

Independent technological glitches forced two separate trading halts on different U.S. exchanges during the week of July 6, 2015. During each halt, all other exchanges remained open. We exploit exogenous variation provided by this unprecedented coincidence, in conjunction with a proprietary data set...

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Bibliographic Details
Published inJournal of financial economics Vol. 126; no. 3; pp. 652 - 667
Main Authors Clark-Joseph, Adam D., Ye, Mao, Zi, Chao
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.12.2017
Elsevier Sequoia S.A
Subjects
HFTs
Liquidity
Market makers
Obligations
Securities markets
Securities trading
Studies
Trading
Trading halt
United States > US
Trading halt
Obligations
Market makers
Liquidity
G24
G14
HFTs
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Summary:Independent technological glitches forced two separate trading halts on different U.S. exchanges during the week of July 6, 2015. During each halt, all other exchanges remained open. We exploit exogenous variation provided by this unprecedented coincidence, in conjunction with a proprietary data set, to identify the causal impact of Designated Market Maker (DMM) participation on liquidity. When the voluntary liquidity providers on one exchange were removed, liquidity remained unchanged; when DMMs were removed, liquidity decreased market-wide. We find evidence consistent with the idea that these DMMs, despite facing only mild formal obligations, significantly improve liquidity in the modern electronic marketplace.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2017.09.001