Market Liquidity: A Study from Proprietary Algorithmic Traders Perspective
Posted: 19 Nov 2015
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
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