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Liquidity determination in an order driven market

Danielsson, Jon and Pyne, Richard (2012) Liquidity determination in an order driven market. The European Journal of Finance, 18 (9). pp. 799-821. ISSN 1351-847X

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Identification Number: 10.1080/1351847X.2011.601654

Abstract

We exploit full order level information from an electronic FX broking system to provide a comprehensive account of the determination of its liquidity. We not only look at bid-ask spreads and trading volumes, but also study the determination of order entry rates and depth measures derived from the entire limit order book. We find strong predictability in the arrival of liquidity supply/demand events. Further, in times of low (high) liquidity, liquidity supply (demand) events are more common. In times of high trading activity and volatility, the ratio of limit to market order arrivals is high but order book spreads and depth deteriorate. These results are consistent with market order traders having better information than limit order traders.

Item Type: Article
Official URL: http://www.tandfonline.com/toc/rejf20/current
Additional Information: © 2012 Taylor and Francis Group, LLC.
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 19 Apr 2013 11:58
Last Modified: 30 May 2014 15:06
URI: http://eprints.lse.ac.uk/id/eprint/37421

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