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The Value of the Designated Market Maker

Published online by Cambridge University Press:  06 April 2009

Kumar Venkataraman  and
Andrew C. Waisburd
Kumar Venkataraman
Affiliation:
[email protected], Edwin L. Cox School of Business, Southern Methodist University, PO Box 750333, Dallas, TX 75275
Andrew C. Waisburd
Affiliation:
[email protected], Harris Investment Management, Inc., 190 S. LaSalle Street, Chicago, IL 60603.
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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 5% 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 3 , September 2007 , pp. 735 - 758
Copyright
Copyright © School of Business Administration, University of Washington 2007

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