Specialists’ Incentives on Government Bond Markets: Lessons from the Italian Case

MTS Italy is the Italian government bonds wholesale secondary market that operates under the specialist system. In order to encourage specialists to provide a high level of liquidity, the Italian Treasury monitors and publicly ranks their performance. This paper investigates whether the ranking system, through its explicit and implicit incentives, effectively affects market makers in their quoting decisions and, consequently, the liquidity conditions of order books. The empirical analysis, based on difference-in-differences models, identifies these effects on specialists’ quoting behavior. Furthermore, the paper highlights a heterogeneous impact among market makers, suggesting these operators are differently exposed to the potential benefits of a ranking system. These results provide important implications for policymakers in the design of financial markets and suggest that traditional microstructure models and empirical studies can be enhanced by taking into account incentives provided by the ranking regime when it exists.