The Role of Market Makers in Liquidity Providing on Emerging OTC Markets

Market makers are key entities providing liquidity to the market. Their activity has influence on transaction costs that are expressed mainly by bid-ask spreads. On unregulated markets a research is quite often cumbersome due to lack of transparent data. The paper presents factors having influence on bid-ask spread quoted by market makers on selected over-the-counter emerging markets. The basis for the analysis are questionnaires provided by local market makers and reports regarding market structure published by market participants. The research encapsulates influence of price volatility, volumes, number and type of market makers on transaction costs. A dependence between these factors has been identified as well as determinants that motivate market makers to narrow the spreads. The spreads are lower in high volume and low volatility environment. Transaction costs are also dependent on a deal size and a current state of the market. Significant diversity of market participants and competition between market makers favour compression of bid-ask spreads even if prices are volatile and regard derivatives