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Korean Journal of Financial Studies 2015;44(1):53-91.
Published online February 28, 2015.
The Effects of Market Making on Price Discovery and Liquidity in Treasury Bond Markets
Hak Kyum Kim, Hee Joon Ahn, Woon Wook Jang
국고채시장의 시장조성활동이 가격발견기능과 유동성에 미치는 영향
김학겸, 안희준, 장운욱
Abstract
In 2010, the Korean government introduced a series of dramatic rule changes on market making in the Korean government bond market to tighten the market making role of primary dealers (PD). We examine the quote and trade data on the on-the-run issues of Korea Treasury Bonds (KTB) to understand the role of PDs in price discovery as well as the effects of the rule changes on the liquidity of KTBs. Our primary findings are as follows. First, liquidity as measured by the number of trades, trading volume, bid-ask spreads, depth, and the market quality index increased substantially after the government tightened PDs’ market making activities. Second, the practice of negotiating trades in the over-the-counter market and then using the exchange market only for reporting purposes almost disappeared after the rule changes. Third, the intraday pattern of the spread changed from a ‘W’ shape to a ‘凸’ shape, suggesting liquidity at the beginning and the end of daily trading sessions improved significantly. Fourth, PDs actively engage in informed trading and that the rule changes reduced the informed trading of PDs. We further find that informed trading generally increases with trade size. Our trade-size analysis shows that, for small and medium-sized trades, those initiated by PDs contain greater information content. For large orders, however, those initiated by Non PDs have more information.
Key Words: 국채전문유통시장,유동성,정보거래,호가 스프레드,Information Trading,Korea Treasury Bond,Liquidity,Market-Making Rule Change,PD(Primary Dealer)제도,Primary Dealer


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