Market Maker Competition And Price Efficiency:Evidence From China NEEQ

The National Equities Exchange and Quotations(NEEQ)is the first stock market to introduce market maker system in China,and it provides a favorable financing platform for the develop and grow of middle and small-sized enterprises.In NEEQ,both negotiating transfer and market making transfer exist and we focus on stocks with market making system.We test the relationship between market maker competition and stock price efficiency.Using the number of market makers as a proxy for competition,the results show a strong positive correlation between competition and stock price efficiency.The market maker competition can promote market quality prominently.Moreover,price efficiency is higher when competing market makers have stronger research ability.We suggest that market maker competition increases price efficiency through two channels: one is the transaction cost,in which competition decreases transaction costs,and the other is orders learning: uninformed market makers learn from orders submitted by informed market makers through competition.We use the number of stocks in the whole market as the proxy of experience for the market maker and find that the latter happens only in the group of market makers with significant experience.