The Role of the Market Maker in International Capital Markets: Challenges and Benefits of Implementation in Emerging Markets

Different forms of market making systems can be found in most developed capital markets. These markets, instead of having a pure electronic limit order book design, follow one of three forms of market making: 1) a quote-driven market making system, 2)a centralized market making system in an order-driven market, and 3) a non-centralized market making system in an order-driven market. This paper analyzes and critically evaluates each system, especially in relation to the application of these designs in emerging capital markets. These countries, in an effort to restructure their market design into a more efficient and attractive venue for international investors, are required to adopt one of the three market making systems found mainly in developed countries. In this study we provide guidance to emerging market regulators for implementing a market making system and prescribe the factors that should be taken into consideration when redesigning their trading system. The challenges and benefits of such an application are set forward along with possible alternatives.