Market making in international capital markets: Challenges and benefits of its implementation in emerging markets

The purpose of this paper is to critically evaluate the different market-making systems found in most developed capital markets and to provide guidance to emerging market regulators for a possible implementation of such a system. The paper looks closely at the market design of seven developed countries focusing on the obligations and privileges of market makers. Through a case study and empirical evidence the paper identifies advantage and disadvantage of a possible implementation of a similar design to an emerging market. The paper identifies three forms of market making applied today: the quote-driven, the centralized and non-centralized systems. Four factors are proposed that regulatory authorities in emerging markets should consider when deciding whether, and which of, the three market-making systems they should implement. These are: current exchange design and the costs of restructuring, international and domestic investors' sentiment towards the exchange, size of the emerging market and the market designs in countries hosting the target foreign capital. The paper looks at the implementation of a market-making system in an emerging market. Further research may investigate other ways of how emerging markets authorities can restructure their markets into more efficient, compatible and trustworthy financial venues in order to attract both domestic and foreign investors. The area of emerging markets' microstructure design and market quality is still relatively under-studied. We provide evidence of the challenges and benefits of the implementation of a market-making system in those markets.