This paper examines the order submission strategies and supply of liquidity by highfrequency participants versus the remainder of participants in the limit order book. The results show that high-frequency participants submit orders at multiple prices in the limit order book, concentrated at or within the quote. This activity translates into the provision of liquidity on an on-going basis, which is robust to fast versus slow and volatile markets, together suggesting that high-frequency participants resolve temporal liquidity imbalances in the limit order book. The evidence is consistent with high-frequency trading (HFT) improving market liquidity, but there remain issues surrounding high-frequency participants' effect on market depth and the difficulty of trading of non-HFT participants.
This article extends previous literature which examines the determinants of the price impact of block trades on the Australian Stock Exchange. As previous literature suggests that liquidity exhibits intraday patterns, we introduce time of day dummy variables to explore time dependencies in price impact. Following theoretical developments in previous literature, the explanatory power of the bid-ask spread, a lagged cumulative stock return variable and a refined measure of market returns are also examined. The model estimated explains approximately 29 per cent of the variation in price impact. Block trades executed in the first hour of trading experience the greatest price impact, while market conditions, lagged stock returns and bid-ask spreads are positively related to price impact. The bid-ask spread provides most of the explanatory power. This suggests that liquidity is the main driver of price impact.Large or 'block' transactions play a major role in trading on stock exchanges worldwide. Nearly half of the trades on the NYSE are made in blocks of 10,000 shares or more. Jain (2003) claims that institutional activity, which is predominantly made up of block transactions, accounts for over 70 per cent of all trading activity. The significant quantity of block trades has led to substantial research in the area. Most examines the price impact of block trades, where price impact is measured by comparing the transaction price to an unperturbed price that would have prevailed if the trade were not executed. 1 The causes of price impact are also addressed in the literature. In particular, this has centred on explaining the magnitude and variation in price impact.
This study provides new evidence regarding the effect of limit order book disclosure on trading behavior. The natural experiment affected by the Sydney Futures Exchange in January 2001, when it increased limit order book disclosure from depth at the best bid and ask prices to depth at the three best bid and ask prices is examined. Evidence was found consistent with a change in trading behavior coinciding with the increase in pre-trade transparency. Consistent with predictions of a theoretical model based on execution risk, a statistically significant decline in depth was found at the best quotes. There is little evidence of an increase in bid-ask spreads. Further, the proportion of market orders exceeding depth at the best quotes increases in a transparent limit order book, reflecting a reduction in execution risk. The study concludes that in a transparent market, limit order traders charge market order traders a higher premium for execution certainty by withdrawing depth from the best quotes, but not by increasing bid-ask spreads.
This study documents the mtraday lead/lag relatIOn between tradmg volumes of stocks and Mock optIOns traded on the ASX and ASX OptIOns Market respectively. A stock lead of up to 15 mmutes IS IflltwUy documented. Differences m mtraday lead/lag relatIOns may occur because of the different nature of eqUitles and optIOns as mstruments of mvestment, or market microstructure differences, or both these factors The study fmds no eVidence that tradzng on przvate mformatzon causes the optIOn market to lead. Instead, market l1ucrostructure differences mduce relatively mfrequent tradzng m optIOn markets and consequently cause stocks to lead SpeCifically, we flfld the stock lead IS ellllllnated when only perIOds of frequent trading are exammed. Also, the lI1frequent trading lI1duced stock lead IS partly explalfled by the different opemng procedures of the two markets
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