Sunshine Trading: Flashes of Trading Intent at the NASDAQ
Johannes Atle Skjeltorp
Central Bank of Norway
RSM Erasmus University; Duisenberg School of Finance
Wing Wah Tham
Erasmus School of Economics - Econometric Institute
May 16, 2012
AFA 2012 Chicago Meetings Paper
Midwest Finance Association 2012 Annual Meetings Paper
We use the introduction and the subsequent removal of the flash order facility (an actionable indication of interest, IOI) from Nasdaq as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We find that flash orders significantly improve liquidity in Nasdaq. In addition overall market quality improves substantially when the flash functionality is introduced and deteriorates when it is removed. One explanation for our findings is that flash orders are placed by less informed traders and fulfil their role as advertisement of uninformed liquidity needs. They successfully attract responses from liquidity providers immediately after the announcement is placed, thus lowering the risk bearing cost for the overall market. Our study is important in understanding the impact of voluntary disclosure, in guiding future market design choices, and in the current debate on dark pools and IOIs.
Number of Pages in PDF File: 61
Keywords: Actionable Indication of Interest (IOI), Flash orders, High-frequency Trading, Market quality, Market transparency, Sunshine trading
JEL Classification: G10, G20, G14working papers series
Date posted: March 22, 2011 ; Last revised: November 28, 2012
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