Title

The Value of the Designated Market Maker

Publication Date

2-15-2006

Abstract

The proliferation of electronic limit order books operating without dealers raises questions regarding the need for intermediaries with affirmative obligations to maintain markets. We develop a simple model of dealer participation and test it using a sample of less liquid firms that trade on the Paris Bourse. The results indicate that firms with designated dealers exhibit better market quality, and that younger firms, smaller firms, and less volatile firms choose a designated dealer. Around the announcement of dealer introduction, stocks experience an average cumulative abnormal return of nearly five percent that is positively correlated with improvements in liquidity. Overall, these findings emphasize the potential benefits of designing better market structures, even within electronic limit order books, and suggest that purely endogenous liquidity provision may not be optimal for all securities.

Document Type

Article

Keywords

Market Maker, Specialist, Exchange, Limit Order Book

Disciplines

Finance

Source

SMU Cox: Finance (Topic)

Language

English

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