@article{ecc46cf7a0414ed592a8a441cb38e3f0,
title = "Market conditions, fragility, and the economics of market making",
abstract = "Using audit-trail data from the Toronto Stock Exchange, we find that market makers scale back in unison when market conditions are unfavorable, which contributes to covariation in liquidity supply, both within and across stocks. Market conditions lower aggregate participation via their impact on trading profits and risk. Contrary to regulatory view, higher stock volatility is associated with more participation and higher profits, even after controlling for other market conditions, including stock volume. Fragility concerns extend to larger stocks and to active participants. The designated market maker mitigates periodic illiquidity created by synchronous withdrawal of market makers in large and small stocks.",
keywords = "Fragility, HFTs, Market makers, Obligations, Volatility",
author = "Amber Anand and Kumar Venkataraman",
note = "Funding Information: We thank the editor (Bill Schwert) and, in particular, an anonymous referee for many constructive suggestions. For comments, we thank Hank Bessembinder, Robert Battalio, Paul Brockman, Ekkehart Boehmer, Al Carrion, Fany Declerck (FIRS discussant), Amy Edwards, Sean Foley, Hans Heidle, Bob Jarrow, Yung-Yu Ma, Pamela Moulton, Lin Peng, Talis Putnins, Michel Robe, Gideon Saar, Avanidhar Subrahmanyam (Western Finance Association discussant), Wingwah Tham (European Finance Association discussant), Laura Tuttle, Bob Schwartz, and seminar participants at Commodity Futures Trading Commission, City University of New York - Baruch College, Cornell University, 2013 EFA conference, 2015 FIRS conference, 2013 FMA conference, Hong Kong University of Science and Technology, Lehigh University, Nanyang Technological University, National University of Singapore, Securities and Exchange Commission, Singapore Management University, 2013 WFA conference, University of Sydney, University of Technology Sydney and University of New South Wales. We are particularly grateful to James Twiss at Investment Industry Regulatory Organization of Canada (IIROC), and Abigail Etches and Judy Lee at the Toronto Stock Exchange for help in obtaining and understanding the data. Amber Anand gratefully acknowledges support from the Snyder Innovation Management Center at Syracuse University, and Kumar Venkataraman from the James M. Collins Chair in Finance at Southern Methodist University. An earlier version of the study was titled “Should exchanges impose market maker obligations?” Publisher Copyright: {\textcopyright} 2016",
year = "2016",
month = aug,
day = "1",
doi = "10.1016/j.jfineco.2016.03.006",
language = "English (US)",
volume = "121",
pages = "327--349",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",
number = "2",
}