We investigate the role of limit orders in the liquidity provision in a pure orderdriven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask bid! side, investors will submit more limit sell~buy! orders than market sell~buy! orders. This result is consistent with the existence of limit-order traders who enter the market and place orders when liquidity is needed.INTEREST IN LIMIT-ORDER TRADING has grown rapidly in recent years as it plays a vital role in the liquidity provision in the world's stock exchanges of different market architectures. In an order-driven market, such as the Paris Bourse or the Tokyo Stock Exchange, all liquidity is provided by limit orders submitted by natural buyers and sellers. Nasdaq market makers are now required to display customer limit orders. The London market uses an electronic order book for smaller orders while large orders are still routed through a dealership mechanism. 767Although limit-order trading is of paramount importance, it was not until recently that researchers began to investigate in depth the role of limitorder trading in the market microstructure literature. ! develop equilibrium models of the limit-order book. On the empirical side, several studies examine the role of limit-order books in supplementing the liquidity provided by the specialists in the NYSE. 3 Although many stock exchanges around the world are based on pure limitorder books, very few empirical papers investigate the role of limit-order traders in an order-driven market without any designated market maker. One notable exception is Biais, Hillion, and Spatt~1995!, who study the computerized limit-order market of the Paris Bourse, investigating the dynamics of the order f low and order book.The objective of this paper is to extend the analysis of the role of limitorder trading in liquidity provision in a pure order-driven market. We focus on the interaction between price volatility and order-f low composition, motivated by several theoretical papers that model the choice of investors in placing limit and market orders in an order-driven market. In the models of Handa and Schwartz~1996! and Handa et al.~1998!, the choice between limit and market orders depends on the investor's beliefs about the probability of his or her limit order executing against an informed or a liquidity trader. Handa and Schwartz~1996! show that in an order-driven market, temporary price f luctuation due to liquidity shocks is a main determinant in the order placement decisions of investors. Transitory volatility attracts limit orders more than market orders as the gains from supplying liquidity exceed the potential loss from trading with informed traders.Foucault~1999! develops a game theoretic model of a dynamic limit-order market. He shows that when the asset volat...

Asian Emerging Markets, corporate social responsibility, corporate valuation, G3, G34, M14,

This paper analyzes the components of the bid-ask spread in the limit-order book of the Tokyo Stock Exchange (TSE). While the behavior of spread components in U.S. markets has been extensively studied, little is known about the spread components in a pure limit-order market. We find that both the adverse selection and order handling cost components of the TSE exhibit U-shape patterns independently, in contrast to the findings of Madhavan, Richardson, and Roomans (1997) for U.S. stocks. On the TSE, there does not exist an upstairs market that allows large trades to be prenegotiated or certified as on the New York Stock Exchange (NYSE). This feature of the TSE provides a valuable opportunity to examine the relationship between trade size and spread components. Our results show that the adverse selection cost increases with trade size while order handling cost decreases with it.

This study examines if informed trading is present in the index option market by analyzing the KOSPI 200 options, the most actively traded derivative product in the world. The spread decomposition model developed by Madhavan, Richardson, and Roomans (1997) is utilized and the adverse-selection cost component of the spread estimated by the model is then used as a proxy for the degree of informed trading. We find that adverse-selection costs constitute a nontrivial portion of the transaction costs in index options trading. Approximately one-third of the spread can be accounted for by information asymmetry costs. A further analysis indicates that adverse-selection costs are positively related with option delta. Our regression analysis shows that option-related variables are significantly associated with estimated information asymmetry costs, even when controlling for proxies for informed trading in the index futures market. Finally, we find the evidence that foreign investors are better informed compared to domestic investors and that domestic institutions have an edge in terms of information over domestic individuals.

In the present study, we examine two important issues related to the information content of a trade in option markets: (i) whether trade size is related to information content; and (ii) whether buy and sell transactions carry different information content. Our analysis is based on comprehensive market microstructure data on the KOSPI 200 options, the single most actively traded derivative securities in the world. We use two structural models modified from the Madhavan et al. [Review of Financial Studies 10 (1997) 1035-1064] model, the size-dependent model (SDM), and the dummy variable model (DVM). The SDM incorporates trade size in the model to estimate the magnitude of the information content of a trade. The DVM separately estimates information contents for buyer-and seller-initiated trades using a dummy variable. Our SDM analysis reveals that large trades are in general more informative than small trades. The results from the DVM analysis indicate that buyer-initiated trades generally have greater information content than seller-initiated trades. A further analysis using investor-type information shows that the asymmetry in information content between buy and sell trades is mostly attributable to the orders submitted by foreign and domestic institutional investors.

No abstract

No abstract

The Tokyo Stock Exchange (TSE) introduced a change in its minimum tick sizes on April 13, 1998, for stocks traded at certain price ranges. We investigate the liquidity and market quality of the stocks affected by the tick size change, using a unique and comprehensive tick-by-tick data. We find that the quoted spread (effective spread) declined significantly by 20 to 50 percent (by 24 to 60 percent) after the tick size change. Reductions in spread are greater for firms with greater tick size reductions, greater trading activity, and higher monopoly rent proportion in the bid-ask spread component. Although investors are more aggressive in posting quotes, there is no definite evidence of an increase in trading volume. Overall, our evidence is consistent with the hypothesis that price competition in the limit order book increased substantially after the tick size change.