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

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. • We study designated market makers liquidity provision in Nyse-Euronext. • We show that they provide liquidity in case of extreme selling pressure concentrated on single stocks. • They instead consume liquidity when selling pressure is systematic. • We use a new identification method for extreme price movements, which crucially allows to assess the above results.