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Trading activity and liquidity supply in a pure limit order book market

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  • GRAMMIG, Joachim
  • HEINEN, Andréas
  • RENGIFO, Erick

Abstract

In this paper we perform an empirical analysis of the trading process in a pure limit order book market, the Xetra system which operates at various European exchanges. We study how present and past liquidity supply and demand as well as price volatility affect future trading activity and market resiliency, and discuss the results in the light of predictions implied by theoretical models of financial market microstructure. Using time series of reconstructed limit order books we identify latent factors which explain future order submission and cancelation decisions, according to hypotheses put forth by microstructure theory. We test these hypotheses with a new econometric methodology for the analysis of multivariate count processes.

Suggested Citation

  • GRAMMIG, Joachim & HEINEN, Andréas & RENGIFO, Erick, 2004. "Trading activity and liquidity supply in a pure limit order book market," LIDAM Discussion Papers CORE 2004058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2004058
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    References listed on IDEAS

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    1. Foucault, Thierry, 1998. "Order Flow Composition and Trading Costs in Dynamic Limit Order Markets," CEPR Discussion Papers 1817, C.E.P.R. Discussion Papers.
    2. 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.
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    4. Bae, Kee-Hong & Jang, Hasung & Park, Kyung Suh, 2003. "Traders' choice between limit and market orders: evidence from NYSE stocks," Journal of Financial Markets, Elsevier, vol. 6(4), pages 517-538, August.
    5. 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.
    6. Robert F. Engle & Asger Lunde, 2003. "Trades and Quotes: A Bivariate Point Process," Journal of Financial Econometrics, Oxford University Press, vol. 1(2), pages 159-188.
    7. PASCUAL, Roberto & VEREDAS, David, 2004. "What pieces of limit order book information are informative ?," LIDAM Discussion Papers CORE 2004033, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Heinen, Andreas, 2003. "Modelling Time Series Count Data: An Autoregressive Conditional Poisson Model," MPRA Paper 8113, University Library of Munich, Germany.
    9. Machado, Jose A.F. & Silva, J. M. C. Santos, 2005. "Quantiles for Counts," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 1226-1237, December.
    10. BAUWENS, Luc & HAUTSCH, Nikolaus, 2003. "Dynamic latent factor models for intensity processes," LIDAM Discussion Papers CORE 2003103, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. HEINEN, Andreas & RENGIFO, Erick, 2003. "Multivariate modelling of time series count data: an autoregressive conditional Poisson model," LIDAM Discussion Papers CORE 2003025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. 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.
    13. repec:adr:anecst:y:2000:i:60:p:03 is not listed on IDEAS
    14. Handa, Puneet & Schwartz, Robert & Tiwari, Ashish, 2003. "Quote setting and price formation in an order driven market," Journal of Financial Markets, Elsevier, vol. 6(4), pages 461-489, August.
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    Cited by:

    1. Johannes Bleher & Michael Bleher & Thomas Dimpfl, 2020. "From orders to prices: A stochastic description of the limit order book to forecast intraday returns," Papers 2004.11953, arXiv.org, revised May 2021.
    2. Kempf, Alexander & Mayston, Daniel, 2006. "Liquidity commonality beyond best prices," CFR Working Papers 06-04, University of Cologne, Centre for Financial Research (CFR).
    3. Aitken, Michael & Almeida, Niall & deB. Harris, Frederick H. & McInish, Thomas H., 2007. "Liquidity supply in electronic markets," Journal of Financial Markets, Elsevier, vol. 10(2), pages 144-168, May.
    4. Pagliacci, Carolina, 2006. "The Venezuelan Overnight Fund Market: Understanding a Credit Constraint Limit Order Market," MPRA Paper 106541, University Library of Munich, Germany.
    5. Giampaoli, Iacopo & Ng, Wing Lon & Constantinou, Nick, 2009. "Analysis of ultra-high-frequency financial data using advanced Fourier transforms," Finance Research Letters, Elsevier, vol. 6(1), pages 47-53, March.

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    More about this item

    Keywords

    market microstructure; liquidity; trading activity; multivariate count process;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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