Paying for Market Quality

Amber Anand; Carsten Tanggaard; Daniel G. Weaver

doi:10.1017/S0022109009990421

Paying for Market Quality

Amber Anand, Carsten Tanggaard, Daniel G. Weaver

Finance Research Group

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avis › Tidsskriftartikel › Forskning › peer review

Abstract

Many financial markets, including electronic limit order markets, assign designated liquidity providers (LPs). We study the experience of the Stockholm Stock Exchange, where listed firms contract directly with LPs. Our analysis offers insights regarding situations where designated liquidity provision may be beneficial, and relating to the form of liquidity provision contracts, including the affirmative obligations required of the LP and compensation for LP services. We find that low current trading activity, wide spreads and higher information asymmetry increase the attractiveness of contracted liquidity provision. The evidence indicates that liquidity providers trade against market movements, and in times of wide spreads. On balance, firms contracting with LPs experience a decreased cost of capital, and significant improvements in market quality and price discovery.

Originalsprog	Engelsk
Tidsskrift	Journal of Financial and Quantitative Analysis
Vol/bind	44
Nummer	6
Sider (fra-til)	1427-1457
ISSN	0022-1090
DOI	https://doi.org/10.1017/S0022109009990421
Status	Udgivet - 2009

Adgang til dokumentet

10.1017/S0022109009990421

Citationsformater

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abstract = "Many financial markets, including electronic limit order markets, assign designated liquidity providers (LPs). We study the experience of the Stockholm Stock Exchange, where listed firms contract directly with LPs. Our analysis offers insights regarding situations where designated liquidity provision may be beneficial, and relating to the form of liquidity provision contracts, including the affirmative obligations required of the LP and compensation for LP services. We find that low current trading activity, wide spreads and higher information asymmetry increase the attractiveness of contracted liquidity provision. The evidence indicates that liquidity providers trade against market movements, and in times of wide spreads. On balance, firms contracting with LPs experience a decreased cost of capital, and significant improvements in market quality and price discovery.",

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AB - Many financial markets, including electronic limit order markets, assign designated liquidity providers (LPs). We study the experience of the Stockholm Stock Exchange, where listed firms contract directly with LPs. Our analysis offers insights regarding situations where designated liquidity provision may be beneficial, and relating to the form of liquidity provision contracts, including the affirmative obligations required of the LP and compensation for LP services. We find that low current trading activity, wide spreads and higher information asymmetry increase the attractiveness of contracted liquidity provision. The evidence indicates that liquidity providers trade against market movements, and in times of wide spreads. On balance, firms contracting with LPs experience a decreased cost of capital, and significant improvements in market quality and price discovery.

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DO - 10.1017/S0022109009990421

M3 - Journal article

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Paying for Market Quality

Abstract

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