Article

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 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.

1 Bookmark
 · 
51 Views
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: a testable hypothesis that trade-based manipulation as proxied by the incidence of ramping alerts raises execution costs on 34 security markets worldwide 2000-2005. The alternative hypothesis is that ramping alerts represent information arrivals that are delayed, unmasked as rumors, or proven false. Using observational error components to represent the presence of a manipulator or the arrival of information in a random effects model, we show that spreads are positively related to the incidence of ramping alerts across 7 of 10 liquidity deciles. The magnitude is economically significant; cutting ramping manipulation by half reduces the effective spread 31, 39, and 59 basis points in the middle liquidity deciles worldwide. In addition, we identify the determinants of manipulation by estimating a simultaneous equations structural model of ramping alert incidence, spreads, and the probability of deploying real-time surveillance (RTS). Direct market access, RTS procedures, regulations requiring surveillance, and a commitment to enforcement reduces trade-based manipulation, assuring better market integrity and enhancing market efficiency. Closing auctions and circuit breakers are associated with increased manipulation but lower spreads, posing an integrity-efficiency tradeoff.
    SSRN eLibrary. 01/2012;
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper examines the impact of a reduction in tick size on the cumulative depth and information content of the order book by using data from the Taiwan Stock Exchange (TWSE). To estimate the information content of the order book, the modified information share proposed by Hasbrouck (1995) and extended by Lien and Shrestha (2009) is used in this paper. The empirical results show that a reduction in tick size will reduce the cumulative orders and information content of the order book. Furthermore, the results suggest that the decrease in the information content of the order book is positively related to the decrease in the cumulative depth of the order book. Finally, the decrease in the information content of the order book is also correlated with the trading activity of foreign investors.
    Capital Markets: Market Microstructure eJournal. 08/2009;
  • Source
    [Show abstract] [Hide abstract]
    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.