The impact of designated market-makers on liquidity in frontier markets

Abstract

Many exchanges around the globe have implemented market-making schemes inan attempt to mitigate liquidity risk and enhance trading volume. This researchexamines the impact of designated market makers on stock liquidity in frontiermarkets, specifically measured by bid-ask spreads and trading turnover. Using adifference-in-differences analysis, we studied 19 stocks that introduced designatedmarket makers at the Zagreb Stock Exchange and Ljubljana Stock Exchangebetween May 2010 and January 2022. To the best of our knowledge, this is the firststudy investigating the impact of market makers in these specific markets and onlythe second in frontier markets overall. As expected, we find a significant reductionin bid-ask spreads for most stocks following the introduction of market makers.However, unlike findings of studies conducted in more developed markets, ourresults for turnover are not conclusive, suggesting that market makers alone maynot be sufficient to overcome structural impediments to market liquidity in frontiermarkets, such as lack of free float and the dominance of large investors with long-term investment horizons.