In search of liquidity: The block broker's choice of where to trade cross-listed stocks (original) (raw)
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A realistic model of market liquidity and depth
Journal of Futures Markets, 2005
A model that realistically defines market liquidity and depth is introduced. Liquidity is the expected rate of order execution in shares per minute. Depth is the average density of the limit order book in shares per dollar. Illiquid markets tend to exhibit longer execution delays and indirectly higher risk related to price impact. Markets with low depth are characterized by high price sensitivity and larger risks. Deviations from fundamental value exist because arbitraging them away carries liquidity cost, entails impact risk, and generates negatively skewed profits. Premia include liquidity and transparency components. In order to avoid excessive frontrunning and liquidity withholding around their block trade, traders break their block orders into smaller orders. In anonymous markets, the trader discriminates against early liquidity providers, and is only compensated for liquidity.
An Analysis of Liquidity Across Markets: Execution Costs on the NYSE versus Electronic Markets
2008
We examine liquidity across different types of markets by using execution costs as a proxy for liquidity. We conduct a thorough analysis of execution costs on the NYSE versus Electronic Markets. We adopt a variety of techniques attempting to correct for the selection bias problem. Unlike current literature, we find that Electronic Markets offer lower execution costs even after controlling for selection biases. In addition to controlling for selection biases at the sample average level of order difficulty, we also carry out our analysis at different levels of order difficulty, measured by a vector of control variables. Our results are robust under different model specifications. Finally, our what-if analysis shows that Electronic Markets' (the NYSE's) orders would have been worse (better) off, had they been executed by the NYSE (Electronic Markets). Overall, our results highlight the superiority of Electronic Markets' liquidity and execution quality.
Liquidity Beyond the Inside Spread: Measuring and Using Information in the Limit Order Book
SSRN Electronic Journal, 2000
World equity markets increasingly convert to electronic trading, in many cases adopting the format of a pure electronic order book without intermediaries. A distinguishing feature of this format is that a high proportion of available liquidity is committed (displayed) rather than implicit or hidden. We examine the properties of a measure of liquidity, the Cost of Round Trip trade (CRT), which aggregates the status of the limit order book at any moment in time for a specific transaction size. CRT, which measures the ex ante committed liquidity immediately available in the market, complements the effective spread, which measures the ex post combination of the committed and hidden liquidity available over a period of time. We use data from the Toronto Stock Exchange to compare CRT to the quoted and effective spreads, and estimate its ability to predict the subsequent trading activity. While we propose CRT as a research tool, we also advocate its use by exchanges to indicate to investors the level of committed liquidity.
Market Response to Liquidity Improvements: Evidence from Exchange Listings
The Financial Review, 2000
The study examines a sample of 895 stocks that moved from Nasdaq to the New York Stock Exchange or to the American Stock Exchange (Amex) between 1971 and 1994. We show how various measures of liquidity such as the bid-ask spread, trading volume, and stock price precision improve in somewhat different ways upon transfer to NYSE (Amex). We also find that reductions in trading costs (percentage spread) and in pricing error volatility (Hasbrouck's us) can explain most of stock market's positive response to exchange listing. Thus, liquidity has many facets and cannot be represented by the bid-ask spread alone.
Journal of Financial Intermediation, 1998
Merrill Lynch's decision to redirect order flow in exchange-listed equity securities from regional exchanges to the New York Stock Exchange (NYSE) provides an opportunity to examine (1) whether order flow affects market makers' spreadsetting behavior and (2) whether brokers can capture liquidity-cost differences between market centers for their customers. Merrill's market-order customers appear to obtain better prices on the NYSE than on the regionals. Consistently with market microstructure theory, the NYSE's quoted spread for stocks affected by Merrill's decision falls relative to a control sample and decreases absolutely for a subsample of stocks we believe most sensitive to order-flow distribution. Journal of Economic Literature Classification Numbers: D40, G10.
Liquidity supply and demand: Empirical evidence from the Vancouver stock exchange
2001
We analyze the costs and benefits of providing and using liquidity in a limit order market. Using a large and comprehensive data set which details the complete histories of orders and trades on the Vancouver Stock Exchange, we are able to model the order flow and measure market liquidity as it changes over time. We accomplish this by constructing a measure of the expected net payoffs to demanding or supplying liquidity, and using our data on order arrivals and placement decisions to make inferences about the traders' demand for liquidity and the cost of entering orders in the market. Our results show that liquidity demand is indeed time varying, and is related to several key observable measures of market characteristics. Furthermore, we find evidence of unexploited profit opportunities in the market, perhaps implying that traders do not continuously monitor the market for profitable trades.
Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong
Journal of Finance, 2001
We investigate the role of limit orders in the liquidity provision in a pure orderdriven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask bid! side, investors will submit more limit sell~buy! orders than market sell~buy! orders. This result is consistent with the existence of limit-order traders who enter the market and place orders when liquidity is needed.
Determinants of Liquidity in Open Electronic Limit Order Book Market
SSRN Electronic Journal, 2000
In the last decade, many emerging capital markets have undergone drastic changes in terms of market microstructure changes, specifically in secondary markets. One of the policy concerns is the improvement of liquidity in markets. We study the various determinants of liquidity with reference to Indian stock market. There is no consensus on the proxies of liquidity in the financial markets. We calculate impact cost as the proxy for liquidity. It captures the trade size information as well as price information.
Prices, Liquidity, and the Information Content of Trades
Review of Financial Studies, 2000
We investigate the effect of asymmetric information on prices and liquidity by analyzing trades, quotes, spreads and depths. Information content should increase with trade size and the degree of information asymmetry of the trading period. Results show that price and liquidity effects are significantly associated with information content as measured by both trade size and the timing of the trade relative to information events. Results are stronger for purchases than sales. Quoted prices are better measures of information effects than transaction prices, because they control for bid-ask bounce. Finally, trades that are known a priori not to contain information have no impact on prices and liquidity, even when they are very large in size.