Message traffic and short-term illiquidity in high-speed markets

We examine which components of message traffic in a high-speed equity market, including orders from traders with varying technological capabilities, signal short-term illiquidity. Our findings show that only the unexpected component of high-frequency traders' (HFTs') net buying pressure — arising from both aggressive and non-aggressive orders — predicts increases in immediacy costs and price impacts. Updates to outstanding limit orders, driven by prior efficient pre returns, strengthen the signaling power of HFTs' order flow. Additionally, market-wide HFTs' net buying pressure improves the ability to forecast short-term illiquidity in individual stocks.