Liquidity supply in electronic markets
ABSTRACT We examine the supply of liquidity by proprietary trading desks and hedge funds (PTDH) versus mutual funds, index funds, and insurance companies (MII) across ten bid (ask) steps of the limit order book. We document that institutional investors simultaneously supply liquidity at multiple prices in the limit order book. We also find that PTDHs are more price aggressive liquidity suppliers than MIIs, consistent with hypothesized responses to observed changes in the cost and risk of non-execution. We investigate whether these findings are robust to fast versus slow markets, the volatility of daily returns, and aggregate depth relative to daily volume.
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ABSTRACT: We investigate the trading behavior and liquidity supply of Chinese initial public offerings (IPOs) that trade in an order-driven market system with pure limit order books where no market makers or price support is allowed. We find large trades and quoted depths dominate the first day of trading, but this pattern quickly reverses as small trades and quoted depths are more prevalent on subsequent trading days. Quoted depths are positively related to the number of shares offered in the IPO and trade size, but are negatively related to underpricing. Trade size and transaction immediacy are positively related, and large and positive (negative) order imbalance is associated with more aggressive buys (sells). Finally, long-run performance is not related to initial order imbalance. Overall, our results suggest that despite underwriters not participating in the IPO aftermarket, liquidity provision evolves very quickly and price discovery is immediately reflected in prices.Financial Review 07/2011; 46(3):459 - 483. DOI:10.1111/j.1540-6288.2011.00308.x
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ABSTRACT: This paper investigates the determinants of the order aggressiveness of institutional and individual investors on the Australian Stock Exchange. Utilizing a proprietary data set that identifies institutional and individual order submissions, we document that the institutional and individual investors become more aggressive when the same-side (opposite-side) market depth increases (decreases). When the spread widens, both individual and institutional investors tend to become less aggressive. Institutional investors are more aggressive in the opening hour of the trading day, while individual investors are less aggressive initially and increase their order aggressiveness during the rest of the trading day.Pacific-Basin Finance Journal 11/2009; 17(5):533-546. DOI:10.1016/j.pacfin.2009.05.001 · 0.55 Impact Factor
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ABSTRACT: This paper examines how order submissions to the electronic limit order book for Eurodollar futures were affected when financial market turmoil generated a dramatic rise in interest rate uncertainty on August 9, 2007. We show that overall depth declined and that the shape of the order book moved away from best prices. We empirically model the decision to add or subtract depth to the order book and demonstrate that prior to August 9, both order placements and order cancellations tended to rapidly restore symmetry to the electronic limit order book. Following August 9, the relationship between the size and shape of the limit order book and incoming orders became muted. We hypothesize that increased uncertainty may have reduced the aggressiveness of high-frequency, algorithmic traders in this market.