The impact of designated market-makers on liquidity in frontier markets: Evidence from Zagreb and Ljubljana Stock Exchanges

Many exchanges around the globe have implemented market-making schemes in an attempt to mitigate liquidity risk and enhance trading volume. This research examines the impact of designated market makers on stock liquidity in frontier markets, specifically measured by bid-ask spreads and trading turnover. Using a difference-in-differences analysis, we studied 19 stocks that introduced designated market makers at the Zagreb Stock Exchange and Ljubljana Stock Exchange between May 2010 and January 2022. To the best of our knowledge, this is the first study investigating the impact of market makers in these specific markets and only the second in frontier markets overall. As expected, we find a significant reduction in bid-ask spreads for most stocks following the introduction of market makers. However, unlike findings of studies conducted in more developed markets, our results for turnover are not conclusive, suggesting that market makers alone may not be sufficient to overcome structural impediments to market liquidity in frontier markets, such as lack of free float and the dominance of large investors with longterm investment horizons.