Liquidity provision: Normal times vs Crashes

Abstract

We study the role of various trader types in providing liquidity in spot and futures markets based on data from the National Stock Exchange of India for a single large stock. During normal times, short-term traders who carry little inventory overnight are the primary liquidity providers in both spot and futures markets. We have two crashes in our sample, both originated in the spot market and spilled into the futures market. Mutual funds had to move in before price recovery took place in both markets. Market stability may require the presence of well-capitalized standby liquidity providers for recovery from crashes.