Liquidity supply in electronic markets

University of New South Wales, Australia; Deutsche Bank AG, Australia; Babcock Graduate School of Management, Wake Forest University, USA; University of Memphis, USA
Journal of Financial Markets (Impact Factor: 1.12). 02/2007; DOI: 10.1016/j.finmar.2006.12.001

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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