Market Liquidity: A Study from Proprietary Algorithmic Traders Perspective

Posted: 19 Nov 2015

See all articles by Ashok Banerjee

Ashok Banerjee

Indian Institute of Management Udaipur

Samarpan Nawn

Indian Institute of Management Udaipur; CFA Institute

Date Written: November 18, 2015

Abstract

In this paper, we investigate the role of proprietary algorithmic traders in facilitating liquidity in a limit order market. We find that they rarely use liquidity removing market orders. Their ability to affect the bid-ask spread with order cancellation rates is maximum among three mutually exclusive and exhaustive groups of traders. Using the tick by tick order level data from National Stock Exchange of India, we find that proprietary algorithmic traders increase limit order provision following a period of high short-term volatility. This is inconsistent with the theory that fast traders leave the market when stress situations arise, although their limit order supplying behaviour becomes neutral when short-term volatility is more informational than transactional.

Keywords: Market Microstructure, algorithmic traders, High-frequency traders, capital markets, regulators, limit orders, liquidity

JEL Classification: G10, G14, G18, G19

Suggested Citation

Banerjee, Ashok and Nawn, Samarpan, Market Liquidity: A Study from Proprietary Algorithmic Traders Perspective (November 18, 2015). Available at SSRN: https://ssrn.com/abstract=2692404 or http://dx.doi.org/10.2139/ssrn.2692404

Ashok Banerjee

Indian Institute of Management Udaipur ( email )

Balicha
Udaipur, Rajasthan 313001
India

Samarpan Nawn (Contact Author)

Indian Institute of Management Udaipur ( email )

Balicha
Udaipur, Rajasthan 313001
India

CFA Institute ( email )

915 East High Street
Charlottesville, VA 22902
United States

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