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Journal of Financial Markets Vol. 76 2025

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

Mario Bellia1,2,3; Kim Christensen4; Aleksey Kolokolov5,6; Loriana Pelizzon7,1,8; Roberto Renò9

1 Ca' Foscari University of Venice · 2 European Commission · 3 European Centre for Living Technology · 4 Aarhus University · 5 New Economic School · 6 Manchester School of Architecture · 7 Goethe University Frankfurt · 8 Leibniz Institute for Financial Research SAFE · 9 École Supérieure des Sciences Économiques et Commerciales

open access

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.

DOI
10.1016/j.finmar.2025.100988
Volume
76
Pages
100988
Language
en
Sources
crossref openalex

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