Transaction Mechanism And Market Quality

The market microstructure literature provides a view that the bond market quality is affected by the choice of transaction mechanism. This paper is just written from the theory to analyze if the introduction of the market maker system has effected the inter-bank bond market quality.The inter-bank bond market has developed a lot since it is set up in June, 1997. Trading body is becoming rich, trading variety is increasing, and so does the activity of transaction. The total trading volume of the bond on the inter-bank market is 38300 billion, which is 20 times more than that trades in the exchange market. The inter-bank bond market is becoming the main trading place of financial institutes and the main carrier of the open operation of the central bank.In 2001, bilateral quoted price system was introduced in China's inter-bank bond market as an embryonic form of the market maker system. And finally the market maker system was made one of the main trading systems on July, 22, 2004. As the first domestic market which adopted the market maker system, the inter-bank bond market has accumulated experiences of several years. How does the system carry on? Has it improved the bond market of China? What influences have the market maker system had to the inter-bank bond market quality such as liquidity, transparency , stability and price discovered process ? Has the introduction of the market maker system enhanced the market quality?With these questions, I make the market maker system as a main line in this paper and analyze the influences on the bond market quality after the change of transaction mechanism from logical to empirical. First this paper theoretically analyzes the relationship between the market maker system and the bond market quality. On the basis of these analyses, I compute the influences that the introduction of the market maker system has had to the inter-bank bond market quality empirically. I complete the analysis from two mentalities:Firstly, complies with the mainstream economic viewpoint, making the transaction cost a tool of measuring liquidity, this paper makes an analysis of the influences to market liquidity brought by the market maker system, which was introduced into inter-bank bond market. And analyze the relation between the market maker system and the bond market quality.Secondly, since the market makers have higher ability to acquire and handle information, the price of the bond should reflect the information quickly. Therefore, the main question is that whether the market makers help to enhance the price discovery efficiency? In the article I carry on an empirical analysis.Thirdly, market maker is responsible to market stability, therefore, the question turn to be that whether the market makers help to decrease market volatility? In the article, I carry on an empirical analysis.The empirical result showed that, the introduction of the market maker system does enhance the market quality. It increases the liquidity of inter-bank bond market and enhances the price discovery efficiency of bond, but not dreases the market volatility. Therefore, the market maker syetem is to be improved.However, we also should see that as a new thing in China's bond market, the market maker system also operates insufficiently. At the end of the article relevant policy suggestions are given in accord with the existing problem in our inter-bank bond market and the experiences from developed countries.