Abstract:
The introduction of the market maker system in the STAR Market pioneered market maker participation in China's A-share market trading. There is an urgent need to summarize and promote the theoretical foundations, operating mechanisms, and effectiveness implications of its impact on stock liquidity. Using the introduction of the market maker system in the STAR Market as a quasi-natural experiment, this paper constructs a multi-period difference-in-differences model and finds that the introduction of the market maker system in the STAR Market significantly improved stock liquidity, with particularly pronounced effects during bear markets and for small-cap stocks, stocks with poor pre-market-making liquidity, and non-lottery-type stocks. Mechanism analysis reveals that market makers: (1) continuously provide bid-ask quotes, injecting incremental information into the market and reducing information asymmetry among investors; (2) guide prices back to intrinsic values through contrarian trading during periods of high short-term market volatility, thereby stabilizing stock price fluctuations; and (3) are subject to incentives and constraints from bid-ask spread limits and market maker evaluation mechanisms, which enhance investor confidence in market-making transactions and increase investor attention and trading willingness. Moving forward, while ensuring compliance and risk control, the market maker system can be further improved and promoted by enhancing flexibility in market maker entry requirements, strengthening supervision of market makers, and incentivizing market makers to fulfill their market-making obligations.
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