Loriana Pelizzon, Professor at Goethe University and Program Director “Systemic Risk Lab” at the Research Center SAFE, together with her co-authors has won the award for the best paper at the 2019 CEPR-Imperial-Plato Market Innovator Conference on Market Structure on June 27. The conference is organized yearly by the Centre for Economic Policy Research (CEPR), the Centre for Global Finance and Technology at the Imperial College London Business School, and Plato Partnership.
The organizers selected her paper “Paying for Market Liquidity: Competition and Incentives” which was co-authored with Mario Bellia (European Commission Joint Research Center), Marti G. Subrahmanyam (New York University), Jun Uno (Waseda University), and Darya Yuferova (Norwegian School of Economics) and published as SAFE Working Paper No. 247. The prize is endowed with 2500 pounds.
In the paper, the authors deal with the question of whether competition and incentives offered to designated market makers (DMMs) improve market liquidity. Using data from NYSE Euronext Paris, the authors show that an exogenous increase in competition among DMMs leads to a significant decrease in quoted and effective spreads, mainly through a reduction in adverse selection costs. In contrast, changes in incentives, through small changes in rebates and requirements for DMMs, do not have any tangible effect on market liquidity. The results are of relevance for designing optimal contracts between exchanges and DMMs and for regulatory market oversight.