Do designated market makers provide liquidity during downward extreme price movements?

Mario Bellia, Kim Christensen, Aleksey Kolokolov, Loriana Pelizzon and Roberto Ren\`o

Papers from arXiv.org

Abstract: We study the trading activity of designated market makers (DMMs) in electronic markets using a unique dataset with audit-trail information on trader classification. DMMs may either adhere to their market-making agreements and offer immediacy during periods of heavy selling pressure, or they might lean-with-the-wind to profit from private information. We test these competing theories during extreme (downward) price movements, which we detect using a novel methodology. We show that DMMs provide liquidity when the selling pressure is concentrated on a single stock, but consume liquidity (leaving liquidity provision to slower traders) when several stocks are affected.

Date: 2026-02
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