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

2025-05-01

Journal of financial markets

AI Summary

This study investigates whether designated market makers fulfill their liquidity-provision obligations or engage in opportunistic trading using private information during extreme market downturns. Leveraging high-frequency audit trail data with trader identity tags, the authors develop a novel methodology to identify both single-stock and synchronized multi-stock extreme price decline events, enabling a granular analysis of market maker behavior. The findings reveal that market makers actively supply liquidity when individual stocks face selling pressure; however, during episodes of synchronized crashes across multiple stocks, they switch roles and become net liquidity consumers, relying on slower-reacting traders to provide liquidity. This result underscores a pronounced heterogeneity in market makers’ liquidity-supply behavior under varying degrees of market stress.

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Multiagent Systems: Mechanism Design
• Data Mining & Knowledge Management: Anomaly/Outlier Detection

Application Category

• Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactions
• Security and Privacy: Data transparency and provenance
• Web Mining and Content Analysis: Bridging structured and unstructured data

Problem

• market makers
• liquidity provision
• extreme price movements
• downward pressure
• electronic markets

Innovation

• designated market makers
• liquidity provision
• extreme price movements
• electronic markets
• trader classification