Do Liquidity Providers Improve Market Quality?: Evidence from the KRX ELW Market

Choe, Hyuk; Woo, Min Cheol

Korean Journal of Financial Studies 2011;40(1):19-55.
Published online February 28, 2011.

Hyuk Choe, Min Cheol Woo

유동성공급자 제도의 도입 효과 분석

최혁, 우민철

Abstract

This paper examines whether liquidity providers improve market quality in the Korean Equity Linked Warrant(ELW) market, after controlling for potential factors which might affect liquidity. From the opening date of the Korean ELW market to May, 31 2009, we analyzed a variety of measures associated with liquidity provision. In this paper, we employed the real-time trading records and order records of ELW of which underlying assets are index and individual stocks. Empirical results indicate that liquidity providers improve market quality after controlling for market risk, idiosyncratic risk, type of warrant, inherent option nature and regulation- related features. Especially, after removing the regulation which prohibit liquidity providers from placing order in the market since one-month of expiration date, Participation of Liquidity providers improve illiquidity ELW market statistically significant. Our study indicates that liquidity provider system improve market quality. To solve the market failure for illiquidity, it is necessary for the financial regulatory institution to consider the introduction or modification of liquidity provider system.

Key Words: 사건연구,유동성 공급자,유동성공급지표,주식워런트증권,회귀분석,Event Study,Liquidity Provider,Provision Measure,Regression,Warrant