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Why Do Firms Pay For Liquidity Provision In Limit Order Markets?

Date Added: Jun 2010
Format: PDF

In recent years, a number of electronic limit order markets have reintroduced market makers for some securities (Designated Market Makers). This trend has mainly been initiated by financial intermediaries and listed firms themselves, without any regulatory pressure. In this paper, the authors ask why firms are willing to pay to improve the secondary market liquidity of their shares. They show that a contributing factor in this decision is the likelihood that the firm will interact with the capital markets in the near future, either because they have capital needs, or that they are planning to repurchase shares.