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Sunshine Trading: Flashes of Trading Intent at the NASDAQ

Author

Listed:
  • Johannes A. Skjeltorp

    (Norges Bank)

  • Elvira Sojli

    (Erasmus University Rotterdam, Duisenberg school of finance)

  • Wing Wah Tham

    (Erasmus University Rotterdam)

Abstract

Forthcoming in the 'Journal of Financial and Quantitative Analysis'. We use the introduction and the subsequent removal of the flash order facility (an actionable indication of interest, IOI) from the NASDAQ as a natural experiment to investigatethe impact of voluntary disclosure of trading intent on market quality. We find that flashorders significantly improve liquidity in the NASDAQ. In addition, overall market qualityimproves substantially when the flash functionality is introduced and deteriorates when it isremoved. One explanation for our findings is that flash orders are placed by less informedtraders and fulfill their role as an advertisement of uninformed liquidity needs. They successfully attract responses from liquidity providers immediately after the announcement isplaced, thus lowering the risk-bearing cost for the overall market. Our study is important inunderstanding the impact of voluntary disclosure, in guiding future market design choices,and in the current debate on dark pools and IOIs.

Suggested Citation

  • Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2012. "Sunshine Trading: Flashes of Trading Intent at the NASDAQ," Tinbergen Institute Discussion Papers 12-141/IV/DSF47, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20120141
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    Cited by:

    1. Hoffmann, Peter, 2013. "A dynamic limit order market with fast and slow traders," Working Paper Series 1526, European Central Bank.
    2. Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2012. "Identifying cross-sided liquidity externalities," Working Paper 2012/20, Norges Bank.
    3. Hoffmann, Peter, 2012. "A dynamic limit order market with fast and slow traders," MPRA Paper 39855, University Library of Munich, Germany.
    4. Hoffmann, Peter, 2012. "A dynamic limit order market with fast and slow traders," MPRA Paper 44621, University Library of Munich, Germany, revised Jan 2013.

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    More about this item

    Keywords

    Actionable Indication of Interest (IOI); Flash orders; High-frequency Trading;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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