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Cross-Venue Liquidity Provision: High Frequency Trading and Ghost Liquidity

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  • Degryse, Hans
  • De Winne, Rudy
  • Gresse, Carole
  • Payne, Richard

Abstract

We measure the extent to which consolidated liquidity in modern fragmented equity markets overstates true liquidity due to a phenomenon that we call Ghost Liquidity (GL) . GL exists when traders place duplicate limit orders on competing venues, intending for only one of the orders to execute, and when one does execute, duplicates are cancelled. We employ data from 2013, covering 91 stocks trading on their primary exchanges and three alternative platforms and where order submitters are identified consistently across venues, to measure the incidence of GL and to investigate its determinants. On average, for every 100 shares passively traded by a multi-market liquidity supplier on a given venue, slightly more than 19 shares are immediately cancelled by the same liquidity supplier on a different venue. This percentage is significantly greater for HFTs than for non-HFTs and for those trading as principal. GL is larger on alternative platforms than on primary exchanges. Overall, GL implies that simply measured consolidated liquidity exceeds true consolidated liquidity but its average weight in total consolidated depth, i.e., slightly more than 4%, does not challenge the liquidity benefits of fragmentation.
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Suggested Citation

  • Degryse, Hans & De Winne, Rudy & Gresse, Carole & Payne, Richard, 2019. "Cross-Venue Liquidity Provision: High Frequency Trading and Ghost Liquidity," LIDAM Discussion Papers LFIN 2019001, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlf:2019001
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    References listed on IDEAS

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    Cited by:

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    2. Griffith, Todd G. & Roseman, Brian S., 2019. "Making cents of tick sizes: The effect of the 2016 U.S. SEC tick size pilot on limit order book liquidity," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 104-121.
    3. Banerjee, Anirban & Nawn, Samarpan, 2024. "Proprietary algorithmic traders and liquidity supply during the pandemic," Finance Research Letters, Elsevier, vol. 61(C).

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    Keywords

    High Frequency Trading ; Algorithmic Trading ; Fragmentation ; Ghost Liquidity;
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