• Key question:
  • how to best incentivize (voluntary) liquidity provision?

• Study the impact of a change in a "Supplemental Liquidity Provider" (SLP; akin DMM) program on NYSE Euronext Paris that:
  •  increased competition among DMMs
  • (slightly) tightened SLP requirements

• Conclude:
  • competition among DMMs improves market liquidity (spreads
  • (small) changes in incentives do not have an impact

• Prior to June 03, 2013:
  • CAC 40 stocks were split into four baskets
  • to qualify, must "make the market" in at least one 
  • market making presence is "by stock"
  • 7 DMMs, possibly split across baskets

• Post June 03, 2013:
  • To qualify, must "make the market" in all CAC40
  • market making presence "by stock" and also on aggregate
  • minor (0.02 bps) increase in a rebate
  • All 7 DMMs remained, +1 entered \(\to \) 8 DMMs in all CAC40

\(\Rightarrow\) Increase in competition among DMMs

• CAC40 are extremely liquid:
  • bid-ask spreads are 2bps (1 cent on a 50 euro stock!)
• What was the key goal of the programme initiation in 2011?
  • ​Protect market share? Re-gain market share?
    • ​Fidessa: market share loss 02/2010 to 02/2011 47% to 37%, to off-exchange
  • Why in most liquid stocks?

• What was the reason for "tightening it" for the (already super liquid!) stocks in 2013?
  • Trends in market share? %-time at the best relative to Chi-X?
  • Were other stocks included? (Dutch? Non-CAC40 French?)
• Did Euronext expect to benefit from this change? (Relative to Chi-X?)
  • Or: did they believe it non-binding and just "simplified"?

• Several events, unclear whether related ....
• 2013: NYSE Euronext is in the process of being acquired by ICE
• Aug. 2012: French Transaction Tax: 
  • marginal effect on SLP stocks
  • remainder: negative shock to trading volume and liquidity
• May 2013: Bats Chi-X becomes a registered exchange
  • Any changes in, e.g., broker obligations?

• How should we measure an increase in competition?
  • Paper (?): an increase in the number of DMMs?
  • Any other evidence that competition has increased? 
    • E.g., more aggressive quote revision & undercutting?

• What is the channel for the impact of competition?
  • Why does the number of DMMs play a role?
    • If price competition \(\to\)7 DMMs is already quite a few .... 
    • Quantity competition?
  • Were there stocks that went from 1 or 2 DMMs to 8)?
    • Is the impact in these stronger?
  • Was the 8th entrant in any way "special"? (E.g., larger HFT?)
    • What prompted entry? (Seemingly, the programme didn't improve ....)
    • Was the trader already there and became and DMM? 
    • Or entered fully new? (HFT competition vs. DMM competition?)

• Any evidence of DMM activity prior to the programme change?
  • Were they trading in stocks that they aren't DMM? 
    • CAC40 is an index ....
    • Affects the interpretation of whether the tightening of the requirements is "binding" ...
  • What are the changes (liq. provision, trading volume, etc) of DMM vs non-DMM across all CAC40?

• Were there non-CAC40 stocks affected?
  • Colliard and Hoffman: 49 French SLP stocks affected by FTT. Dutch Stocks?
    • What are the requirements for these stocks?
  • Any responses in these stocks?

• which stocks are included?
• What are the requirements and fees for the remainder?
• Are the preferential fees/rebates only for the stocks of responsibility or for all stocks?
  • Does it make sense to provide liquidity/trade in index stocks that one isn't a DMM or is it worth becoming a DMM?

• Average/median stock price?
• Price changes for CAC40 and DAX30
  • Can the 0.02 bps change in the spread be a price effect?
    • Any changes in spread in euros?

What about other measures of liquidity/activity?

• Depth?
• Trading volume and/or NYSE Euronext market share?
• % time at the best? % time at the best relative to Chi-X?