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Liquidity dynamics in an electronic open limit order book: An event study approach

  • Gomber, Peter
  • Schweickert, Uwe
  • Theissen, Erik

We analyze the dynamics of liquidity in Xetra, an electronic open limit order book. We use the Exchange Liquidity Measure (XLM), a measure of the cost of a roundtrip trade of given size V. This measure captures the price and the quantity dimension of liquidity. We present descriptive statistics, analyze the cross-sectional determinants of the XLM measure and document its intraday pattern. Our main contribution is an analysis of the dynamics of the XLM measure around liquidity shocks. We use intraday event study methodology to analyze how a shock affects the XLM measure. We consider two sets of liquidity shocks, large transactions (which are endogenous events because they originate in the market) and Bloomberg ticker news items (which are exogenous events because they originate outside of the market). We find that resiliency after large transactions is high, i.e., liquidity quickly reverts to normal levels. We further document that large trades take place at times when liquidity is unusually high. We interpret this as evidence that large transactions are timed. The Bloomberg ticker news items do not have a discernible effect on liquidity.

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Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 11-14.

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Date of creation: 2011
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Handle: RePEc:zbw:cfrwps:1114
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  1. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
  2. Helena, BELTRAN & Pierre, GIOT & Joachim, GRAMMIG, 2005. "Commonalities in the order book," Discussion Papers (ECON - Département des Sciences Economiques) 2005014, Université catholique de Louvain, Département des Sciences Economiques.
  3. Angelo Ranaldo, 2002. "Market Dynamics Around Public Information Arrivals," FAME Research Paper Series rp45, International Center for Financial Asset Management and Engineering.
  4. Kasch-Haroutounian, Maria & Theissen, Erik, 2006. "Competition between exchanges: Euronext versus Xetra," CFR Working Papers 07-10, University of Cologne, Centre for Financial Research (CFR).
  5. van Achter, Mark, 2008. "Dynamic limit order market with diversity in trading horizons," CFS Working Paper Series 2008/46, Center for Financial Studies (CFS).
  6. John R. Graham & Jennifer L. Koski & Uri Loewenstein, 2006. "Information Flow and Liquidity around Anticipated and Unanticipated Dividend Announcements," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2301-2336, September.
  7. Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-74.
  8. Large, Jeremy, 2007. "Measuring the resiliency of an electronic limit order book," Journal of Financial Markets, Elsevier, vol. 10(1), pages 1-25, February.
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