Market conditions, fragility, and the economics of market making

Amber Anand, Kumar Venkataraman

Research output: Contribution to journalArticle

10 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)327-349
Number of pages23
JournalJournal of Financial Economics
Volume121
Issue number2
DOIs
StatePublished - Aug 1 2016

Fingerprint

Fragility
Market conditions
Market making
Economics
Market makers
Profit
Participation
Illiquidity
Stock exchange
Stock volatility
Audit
Liquidity

Keywords

  • Fragility
  • HFTs
  • Market makers
  • Obligations
  • Volatility

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

Market conditions, fragility, and the economics of market making. / Anand, Amber; Venkataraman, Kumar.

In: Journal of Financial Economics, Vol. 121, No. 2, 01.08.2016, p. 327-349.

Research output: Contribution to journalArticle

@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",
year = "2016",
month = "8",
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",

}

TY - JOUR

T1 - Market conditions, fragility, and the economics of market making

AU - Anand, Amber

AU - Venkataraman, Kumar

PY - 2016/8/1

Y1 - 2016/8/1

N2 - 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.

AB - 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.

KW - Fragility

KW - HFTs

KW - Market makers

KW - Obligations

KW - Volatility

UR - http://www.scopus.com/inward/record.url?scp=84963595660&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84963595660&partnerID=8YFLogxK

U2 - 10.1016/j.jfineco.2016.03.006

DO - 10.1016/j.jfineco.2016.03.006

M3 - Article

AN - SCOPUS:84963595660

VL - 121

SP - 327

EP - 349

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 2

ER -