Summary:
Though becoming the world's second-largest bond market, China's bond market faces challenges like poor overall liquidity, weak price discovery. Notably,low liquidity, particularly in the exchange bond market accessible to retail investors, increases corporate financing costs and bond market volatility, restricting its development. To enhance liquidity and market-oriented pricing ability, China Exchange Bond Market piloted a market maker system in February 2022 and formally launched it in February 2023, later than its adoption in international markets and China's interbank market. Empirical research on the impact of the market maker system in the exchange bond market is lacking. This paper examines the effect of the quote-driven trading mechanism (i.e., the market maker system) on bond pricing by using its implementation in China's exchange bond market as a policy shock within a difference-in-differences (DID) model. The results show that quote-driven trading provided by the market maker system reduces secondary market bond credit spreads. Mechanism analysis reveals that the market maker system achieves this reduction by improving liquidity and alleviating information asymmetry. Moreover, a greater number of market makers for the same bond and closer geographical distance between market makers and the issuers could strengthen the information discovery effect, further reducing information asymmetry and narrowing credit spreads. Additional analysis indicates that the system also lowers credit spreads for non-market-making bonds sharing the same issuer, industry, or region with market-making bonds. It also reduces primary market issuance spreads for subsequent bonds from issuers with market-making bonds. Crucially, the market maker effect is more pronounced for dealer-selected bonds and bonds with AA+issuer ratings. Policies should thus encourage market makers to diversify their selections. Overall, the market maker system in China Exchange Bond Market lowers bond financing costs and promotes high-quality development in the bond market. Contributions of this paper are threefold: First, it enriches the research on market maker system effects, specifically in China Exchange Bond Market, while existing studies primarily analyze its effects in China Interbank Bond Market. This paper adopts a difference-in-differences design to analyze the impact of whether exchange-traded bonds are market-made on their subsequent secondary market pricing at the first time. The conclusions find that the market maker system not only reduces the secondary market spread of market-made bonds but also further decreases the subsequent primary market bond issuance spreads of the issuers of market-made bonds. Therefore, this paper confirms the positive effects of the market-making system from the perspective of the China Exchange Bond Market. Second, it enriches the research on the influencing factors of bond spreads. The existing literature on the influencing factors of bond spreads mostly discusses from the perspectives of macro policies and micro enterprise characteristics, with scant empirical literature to explore the impact of market makers in China Exchange Bond Market on bond spreads. This paper, however, enriches the impact of the implementation of the market maker system in China Exchange Bond Market on bond spreads from the perspective of bond intermediary institutions. Third, this paper uses the externality theory to evaluate the positive effects and limitations of the market maker system, and puts forward corresponding policy suggestions for these limitations, thereby further expanding the space for the functional effects of market makers to be exerted. As an early empirical analysis of the market maker system in China Exchange Bond Market, this paper provides evidence for the system's positive effects. Authorities should refine the system to improve liquidity and price discovery in the bond market, thereby better serving high-quality development of the real economy. Given the stronger effect on dealer-selected bonds and AA+rated issuers, exchanges should encourage market makers to expand their selections across sectors/regions maximize these market benefits and foster high-quality development in the bond market.
刘颖斐, 李豪飞, 林晚发. 交易所做市商制度与债券市场高质量发展[J]. 金融研究, 2025, 541(7): 188-206.
LIU Yingfei, LI Haofei, LIN Wanfa. Market Maker System in Exchange Bond Market and High-Quality Development of the Bond Market. Journal of Financial Research, 2025, 541(7): 188-206.
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