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Decomposing liquidity along the limit order book

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  • Rakowski, David
  • Wang Beardsley, Xiaoxin

Abstract

In this paper, we estimate the asymmetric information and order processing components of liquidity at extended depths along the limit order book. Using data from the INET ECN, we find that the asymmetric information component decreases as depth increases. Inactive stocks have more information asymmetry at the inside quotes, but it decreases more rapidly along the book than for active stocks. The order processing component of liquidity has fixed and variable constituents, consistent with a fixed cost per order as well as a variable portion based on the size of the order.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 8 (August)
Pages: 1687-1698

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:8:p:1687-1698

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  1. Sugato Chakravarty & Craig Holden, 2002. "An Integrated Model of Market and Limit Orders," Finance 0201004, EconWPA.
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Citations

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Cited by:
  1. Chung, Dennis & Hrazdil, Karel, 2010. "Liquidity and market efficiency: A large sample study," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2346-2357, October.
  2. Lukas Menkhoff & Carol L. Osler & Maik Schmeling, 2010. "Limit-Order Submission Strategies under Asymmetric Information," CESifo Working Paper Series 3054, CESifo Group Munich.
  3. Kryzanowski, Lawrence & Lazrak, Skander & Rakita, Ian, 2010. "Behavior of liquidity and returns around Canadian seasoned equity offerings," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2954-2967, December.
  4. Wu, YiLin, 2010. "What's in a name? What leads a firm to change its name and what the new name foreshadows," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1344-1359, June.
  5. Wei, Jason & Zheng, Jinguo, 2010. "Trading activity and bid-ask spreads of individual equity options," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2897-2916, December.
  6. Chung, Dennis Y. & Hrazdil, Karel, 2012. "Speed of convergence to market efficiency: The role of ECNs," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 702-720.
  7. Chung, Dennis Y. & Hrazdil, Karel, 2010. "Liquidity and market efficiency: Analysis of NASDAQ firms," Global Finance Journal, Elsevier, vol. 21(3), pages 262-274.
  8. Dumitrescu, Ariadna, 2010. "The strategic specialist and imperfect competition in a limit order market," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 255-266, January.

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