This paper examines how the market performs in the presence of dealers during times that predominately reflect stressful market conditions. It examines this issue on the Nasdaq around unpredictable news events, i.e. the analyst recommendation changes. The sample period is 2004 at times where Nasdaq dealers were less constrained by regulation, and were actively providing liquidity on the system. The findings suggest that environments where dealers have affiliation with the analyst issuing the recommendation seem to perform particularly better as opposed to environments where they may not be. The results show narrower spreads, more trades and a more two-sided market when the report is issued by affiliated analysts, but a higher price volatility shortly before the release of the report. These results have important policy implications because they support the claim of market regulators. That is, there is an improvement in liquidity in the presence of informed dealers, as buyers and sellers are both in the market. This fact signals liquidity creation, and translates to more market stability in the period leading to the report release.
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