IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v21y2015i1p52-78.html
   My bibliography  Save this article

Liquidity Dynamics in an Electronic Open Limit Order Book: an Event Study Approach

Author

Listed:
  • Peter Gomber
  • Uwe Schweickert
  • Erik Theissen

Abstract

We analyse the dynamics of liquidity in an electronic limit order book using the Exchange Liquidity Measure (XLM), a measure of the cost of a roundtrip trade of given size V. We use intraday event study methodology to analyse how liquidity shocks †large transactions and Bloomberg ticker news †affect the XLM. We find that resiliency after large transactions is high, i.e., liquidity quickly reverts to ‘normal’ levels. Large trades are ‘timed’; they take place at times when liquidity is unusually high. Bloomberg ticker news items do not have a discernible effect on liquidity.

Suggested Citation

  • Peter Gomber & Uwe Schweickert & Erik Theissen, 2015. "Liquidity Dynamics in an Electronic Open Limit Order Book: an Event Study Approach," European Financial Management, European Financial Management Association, vol. 21(1), pages 52-78, January.
    • Handle: RePEc:bla:eufman:v:21:y:2015:i:1:p:52-78
    DOI: 10.1111/j.1468-036X.2013.12006.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1468-036X.2013.12006.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1468-036X.2013.12006.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hee‐Joon Ahn & Kee‐Hong Bae & Kalok Chan, 2001. "Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong," Journal of Finance, American Finance Association, vol. 56(2), pages 767-788, April.
    2. Foucault, Thierry, 1998. "Order Flow Composition and Trading Costs in Dynamic Limit Order Markets," CEPR Discussion Papers 1817, C.E.P.R. Discussion Papers.
    3. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
    4. Héléna Beltran-Lopez & Pierre Giot & Joachim Grammig, 2009. "Commonalities in the order book," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 23(3), pages 209-242, September.
    5. Kari Harju & Syed Mujahid Hussain, 2011. "Intraday Seasonalities and Macroeconomic News Announcements," European Financial Management, European Financial Management Association, vol. 17(2), pages 367-390, March.
    6. Thierry Foucault & Sophie Moinas & Erik Theissen, 2007. "Does Anonymity Matter in Electronic Limit Order Markets?," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1707-1747, 2007 28.
    7. Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-374.
    8. Raymond M. Brooks & Ajay Patel & Tie Su, 2003. "How the Equity Market Responds to Unanticipated Events," The Journal of Business, University of Chicago Press, vol. 76(1), pages 109-134, January.
    9. Hans Degryse & Frank De Jong & Maarten Van Ravenswaaij & Gunther Wuyts, 2005. "Aggressive Orders and the Resiliency of a Limit Order Market," Review of Finance, European Finance Association, vol. 9(2), pages 201-242.
    10. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. "An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, vol. 50(5), pages 1655-1689, December.
    11. Maria Kasch‐Haroutounian & Erik Theissen, 2009. "Competition between Exchanges: Euronext versus Xetra," European Financial Management, European Financial Management Association, vol. 15(1), pages 181-207, January.
    12. Handa, Puneet & Schwartz, Robert A, 1996. "Limit Order Trading," Journal of Finance, American Finance Association, vol. 51(5), pages 1835-1861, December.
    13. Venkatesh, P C & Chiang, R, 1986. "Information Asymmetry and the Dealer's Bid-Ask Spread: A Case Study of Earnings and Dividend Announcements," Journal of Finance, American Finance Association, vol. 41(5), pages 1089-1102, December.
    14. Krinsky, Itzhak & Lee, Jason, 1996. "Earnings Announcements and the Components of the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 51(4), pages 1523-1535, September.
    15. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
    16. Ronald L. Goettler & Christine A. Parlour & Uday Rajan, 2005. "Equilibrium in a Dynamic Limit Order Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2149-2192, October.
    17. Ioanid Rosu, 2009. "A Dynamic Model of the Limit Order Book," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4601-4641, November.
    18. Ranaldo, Angelo, 2004. "Order aggressiveness in limit order book markets," Journal of Financial Markets, Elsevier, vol. 7(1), pages 53-74, January.
    19. van Achter, Mark, 2008. "Dynamic limit order market with diversity in trading horizons," CFS Working Paper Series 2008/46, Center for Financial Studies (CFS).
    20. John R. Graham & Jennifer L. Koski & Uri Loewenstein, 2006. "Information Flow and Liquidity around Anticipated and Unanticipated Dividend Announcements," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2301-2336, September.
    21. Bessembinder, Hendrik & Panayides, Marios & Venkataraman, Kumar, 2009. "Hidden liquidity: An analysis of order exposure strategies in electronic stock markets," Journal of Financial Economics, Elsevier, vol. 94(3), pages 361-383, December.
    22. Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, vol. 2(2), pages 99-134, May.
    23. Pierre Giot & Joachim Grammig, 2006. "How large is liquidity risk in an automated auction market?," Empirical Economics, Springer, vol. 30(4), pages 867-887, January.
    24. Glosten, Lawrence R, 1994. "Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-1161, September.
    25. Angelo Ranaldo, 2002. "Market Dynamics Around Public Information Arrivals," FAME Research Paper Series rp45, International Center for Financial Asset Management and Engineering.
    26. Ioanid Rosu, 2009. "A Dynamic Model of the Limit Order Book," Post-Print hal-00515873, HAL.
    27. Large, Jeremy, 2007. "Measuring the resiliency of an electronic limit order book," Journal of Financial Markets, Elsevier, vol. 10(1), pages 1-25, February.
    28. Alexander Kempf & Daniel Mayston, 2008. "Liquidity Commonality Beyond Best Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 31(1), pages 25-40, March.
    29. I. Krinsky & J. Lee, 1996. "Earning Announcements and the Components of the Bid-Ask Aspread," Quantitative Studies in Economics and Population Research Reports 313, McMaster University.
    30. James Richard Cummings & Alex Frino, 2010. "Further analysis of the speed of response to large trades in interest rate futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(8), pages 705-724, August.
    31. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thomas A. P. de Boer & Cornelis Gardebroek & Joost M. E. Pennings & Andres Trujillo‐Barrera, 2022. "Intraday liquidity in soybean complex futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(7), pages 1189-1211, July.
    2. Matthias Schnaubelt & Jonas Rende & Christopher Krauss, 2019. "Testing Stylized Facts of Bitcoin Limit Order Books," JRFM, MDPI, vol. 12(1), pages 1-30, February.
    3. Marvin Wee & Joey W. Yang, 2016. "The Evolution of Informed Liquidity Provision: Evidence from an Order†driven Market," European Financial Management, European Financial Management Association, vol. 22(5), pages 882-915, November.
    4. Pelizzon, Loriana & Sagade, Satchit & Vozian, Katia, 2020. "Resiliency: Cross-venue dynamics with Hawkes processes," SAFE Working Paper Series 291, Leibniz Institute for Financial Research SAFE.
    5. Jeon, Yoontae & Samarbakhsh, Laleh & Hewitt, Kenji, 2021. "Fragmentation in the Bitcoin market: Evidence from multiple coexisting order books," Finance Research Letters, Elsevier, vol. 39(C).
    6. Olaf Korn & Paolo Krischak & Erik Theissen, 2019. "Illiquidity transmission from spot to futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(10), pages 1228-1249, October.
    7. Olbrys, Joanna & Mursztyn, Michal, 2019. "Estimation of intraday stock market resiliency: Short-Time Fourier Transform approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 535(C).
    8. Siikanen, Milla & Kanniainen, Juho & Luoma, Arto, 2017. "What drives the sensitivity of limit order books to company announcement arrivals?," Economics Letters, Elsevier, vol. 159(C), pages 65-68.
    9. Benjamin Clapham & Martin Haferkorn & Kai Zimmermann, 2020. "Does Speed Matter? The Role Of High‐Frequency Trading For Order Book Resiliency," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(4), pages 933-964, December.
    10. Olbrys, Joanna & Mursztyn, Michal, 2019. "Measuring stock market resiliency with Discrete Fourier Transform for high frequency data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 513(C), pages 248-256.
    11. Fullwood, Jonathan & Massacci, Daniele, 2018. "Liquidity resilience in the UK gilt futures market: evidence from the order book," Bank of England working papers 744, Bank of England.
    12. Martin Angerer & Georg Peter & Sebastian Stoeckl & Thomas Wachter & Matthias Bank & Marco Menichetti, 2018. "Bid-Ask Spread Patterns and the Optimal Timing for Discretionary Liquidity Traders on Xetra," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 70(3), pages 209-230, July.
    13. Siikanen, Milla & Kanniainen, Juho & Valli, Jaakko, 2017. "Limit order books and liquidity around scheduled and non-scheduled announcements: Empirical evidence from NASDAQ Nordic," Finance Research Letters, Elsevier, vol. 21(C), pages 264-271.
    14. Ying Chen & Wee Song Chua & Wolfgang Karl Härdle, 2019. "Forecasting limit order book liquidity supply–demand curves with functional autoregressive dynamics," Quantitative Finance, Taylor & Francis Journals, vol. 19(9), pages 1473-1489, September.
    15. Schnaubelt, Matthias, 2022. "Deep reinforcement learning for the optimal placement of cryptocurrency limit orders," European Journal of Operational Research, Elsevier, vol. 296(3), pages 993-1006.
    16. Schnaubelt, Matthias, 2020. "Deep reinforcement learning for the optimal placement of cryptocurrency limit orders," FAU Discussion Papers in Economics 05/2020, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    17. Daniel Havran & Kata Varadi, 2015. "Price Impact and the Recovery of the Limit Order Book: Why Should We Care About Informed Liquidity Providers?," CERS-IE WORKING PAPERS 1540, Institute of Economics, Centre for Economic and Regional Studies.
    18. Hai-Chuan Xu & Wei Chen & Xiong Xiong & Wei Zhang & Wei-Xing Zhou & H Eugene Stanley, 2016. "Limit-order book resiliency after effective market orders: Spread, depth and intensity," Papers 1602.00731, arXiv.org, revised Feb 2017.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roberto Pascual & David Veredas, 2010. "Does the Open Limit Order Book Matter in Explaining Informational Volatility?," Journal of Financial Econometrics, Oxford University Press, vol. 8(1), pages 57-87, Winter.
    2. Menkhoff, Lukas & Osler, Carol L. & Schmeling, Maik, 2010. "Limit-order submission strategies under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2665-2677, November.
    3. Danny Lo, 2015. "Essays in Market Microstructure and Investor Trading," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4-2015.
    4. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
    5. Stenfors, Alexis & Susai, Masayuki, 2019. "Liquidity withdrawal in the FX spot market: A cross-country study using high-frequency data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 36-57.
    6. Danny Lo, 2015. "Essays in Market Microstructure and Investor Trading," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 22, July-Dece.
    7. Katarzyna Bień-Barkowska, 2014. "Capturing Order Book Dynamics in the Interbank EUR/PLN Spot Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(1), pages 93-117, January.
    8. Duong, Huu Nhan & Kalev, Petko S., 2013. "Anonymity and order submissions," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 101-118.
    9. PASCUAL, Roberto & VEREDAS, David, 2006. "Does the open limit order book matter in explaining long run volatility ?," LIDAM Discussion Papers CORE 2006110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    10. G. Wuyts, 2007. "Stock Market Liquidity.Determinants and Implications," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(2), pages 279-316.
    11. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    12. Ingrid Lo & Stephen Sapp, 2011. "Belief Dispersion and Order Submission Strategies in the Foreign Exchange Market," Staff Working Papers 11-8, Bank of Canada.
    13. Katarzyna Bień-Barkowska, 2014. "“Every move you make, every step you take, I’ll be watching you” – the quest for hidden orders in the interbank FX spot market," Bank i Kredyt, Narodowy Bank Polski, vol. 45(3), pages 197-224.
    14. Daniel Havran & Kata Varadi, 2015. "Price Impact and the Recovery of the Limit Order Book: Why Should We Care About Informed Liquidity Providers?," CERS-IE WORKING PAPERS 1540, Institute of Economics, Centre for Economic and Regional Studies.
    15. Lo, Ingrid & Sapp, Stephen G., 2010. "Order aggressiveness and quantity: How are they determined in a limit order market?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(3), pages 213-237, July.
    16. Tseng, Yi-Heng & Chen, Shu-Heng, 2015. "Limit order book transparency and order aggressiveness at the closing call: Lessons from the TWSE 2012 new information disclosure mechanism," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 241-272.
    17. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2013.
    18. Ladley, Dan & Schenk-Hoppé, Klaus Reiner, 2009. "Do stylised facts of order book markets need strategic behaviour?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 817-831, April.
    19. Jiangze Bian & Kalok Chan & Donghui Shi & Hao Zhou, 2018. "Do Behavioral Biases Affect Order Aggressiveness?," Review of Finance, European Finance Association, vol. 22(3), pages 1121-1151.
    20. Bayar, Onur, 2013. "Liquidity provision in a limit order book without adverse selection," Journal of Economics and Business, Elsevier, vol. 66(C), pages 98-124.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:21:y:2015:i:1:p:52-78. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efmaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.