Market‐Maker Mechanism, Information Asymmetry, and Market Quality: Evidence From China

ABSTRACT This study employs intraday quote data from China's Sci‐Tech Innovation Board ( STAR market) between 2020 and 2024 to investigate how the market‐maker mechanism affects the information asymmetry faced by investors during the quoting and execution process. By decomposing high‐frequency bid‐ask spreads, we measure the adverse selection component to quantify information asymmetry among transactions. We find that the introduction of market makers significantly mitigates information asymmetry by 29.92%, particularly in stocks with lower institutional ownership, insufficient liquidity, high volatility, and elevated abnormal trading volume. Multi‐dealer competition also amplifies this effect. We show that the beneficial effect operates primarily through improved market liquidity and curtailed price volatility. Furthermore, the reduction in information asymmetry induced by the market‐maker mechanism facilitates greater price efficiency, primarily by accelerating the incorporation of market‐wide information, while exhibiting no significant effect on the integration of firm‐specific news. Finally, we find that market makers on the STAR market exhibit a ‘fair‐weather market making’ tendency.