Aarhus University Seal

Paying for Market Quality

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

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.
Original languageEnglish
JournalJournal of Financial and Quantitative Analysis
Pages (from-to)1427-1457
Publication statusPublished - 2009

See relations at Aarhus University Citationformats

ID: 41494