Publication

Abstract : Emerging stock markets across the globe are seen to be volatile and also face liquidity problems, vis-à-vis the more matured markets of the developed world. In order to make markets more efficient and an attractive venue for international investors, regulators are required to adopt a suitable market making design. For the purpose of the study on emerging stock markets, the Indian stock market data is analyzed in this paper. Various studies and analyses on the Indian stock markets show that being an emerging market, the volatility of the market is relatively high when compared to that of the other matured developed stock markets like NASDAQ and NYSE. Higher the volatility of a market, higher is the risk involved for investors. Unlike the stock markets of NASDAQ and NYSE, absence of an electronic market maker in the Indian markets appears to be an obvious reason for the prevailing high volatility and this issue is investigated in this paper. The electronic market makers prevalent in the developed markets are generally seen to have a stabilizing effect on the market, apparently reducing volatility to a great extent. This paper demonstrates the suitability of Extended Glosten and Milgrom (EGM) market maker model as the electronic market maker for the Bombay Stock Exchange (BSE) of India. The market maker in the EGM model sets the bid-ask prices based on the orders placed by the traders. It is shown that in the EGM model, the market maker’s quotes reflect the intrinsic value of the stock and any change in the fundamental value (in case of jumps) causes fluctuations in the quotes that are very quickly resolved, thereby bringing stability in the market. The results of the experiments done on the real data from BSE show that, this model can be used as the market maker in the context of any emerging market. This would induce more stability and reduce the volatility, thereby making the market safe for genuine investors. © Research India Publications.