Liquidity Providers on the Nordic Exchange

Abstract: The purpose of this paper is threefold. Firstly, the paper examines the relationship between stock returns and market makers on the Nordic Exchange. As the first study of its kind this paper focuses on the introduction of a market making service, but also the termination of such a service and its effects on asset pricing. The findings are in line with previous studies that the introduction of a liquidity provider is associated with abnormal returns. The results also show that there is no statistically significant evidence that the removal of a liquidity provider affects stock returns. Secondly, we analyze the effects on market quality and trading activity following the removal of a liquidity provider. We find no significant results that would indicate that the firms terminating their liquidity provider agreement suffer from a worsened market quality such as increased spreads, decreased market depth or trading activity. Finally, as the first paper to study which firms choose to terminate their contract with a liquidity provider, we perform a probit regression on common firm characteristics. We find evidence that the attributes turnover and spread are the foremost determinants in the firms’ decision to terminate its liquidity providing contract.