Do Designated Market Makers Provide Liquidity During Extreme Price Movements?

54 Pages Posted: 24 Mar 2020 Last revised: 16 Jan 2024

See all articles by Mario Bellia

Mario Bellia

European Union - JRC-Ispra, European Commision

Kim Christensen

Aarhus University - CREATES

Aleksey Kolokolov

University of Manchester - Manchester Business School

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

Roberto Renò

ESSEC Business School

Date Written: January 15, 2024

Abstract

We study the trading activity of designated market makers (DMMs) in a electronic market based on a unique dataset with audit-trail information on trader classification. We test competing theories about the liquidity provision of DMMs in a sample of extreme price movements, where stocks sold off. DMMs may (or may not) stick to their market making agreement and offer immediacy in the wake of heavy selling pressure. They may even decide to lean-with-the-wind in an attempt to profit from private information. We show that DMMs provide liquidity when the selling pressure is concentrated to a single stock, but they consume liquidity when several stocks are affected. In the latter case, the role of liquidity providers is assumed by slow traders.

Keywords: designated market makers (DMMs); extreme price movements (EPMs); high- frequency traders (HFTs); liquidity provision.

JEL Classification: G10, G14

Suggested Citation

Bellia, Mario and Christensen, Kim and Kolokolov, Aleksey and Pelizzon, Loriana and Renò, Roberto, Do Designated Market Makers Provide Liquidity During Extreme Price Movements? (January 15, 2024). SAFE Working Paper No. 270, Available at SSRN: https://ssrn.com/abstract=3560238 or http://dx.doi.org/10.2139/ssrn.3560238

Mario Bellia

European Union - JRC-Ispra, European Commision ( email )

Via Enrico Fermi 2749, Ispra, VA
Ispra (VA), 21027
Italy

Kim Christensen

Aarhus University - CREATES ( email )

Department of Economics and Business Economics
Fuglesangs Allé 4
Aarhus V, 8210
Denmark

Aleksey Kolokolov

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Roberto Renò

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

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