Trader Positions and Marketwide Liquidity Demand

36 Pages Posted: 9 Oct 2017

See all articles by Esen Onur

Esen Onur

Commodity Futures Trading Commission (CFTC)

John Spencer Roberts

Commodity Futures Trading Commission (CFTC)

Tugkan Tuzun

Board of Governors of the Federal Reserve System

Date Written: October, 2017

Abstract

In electronic, liquid markets, traders frequently change their positions. The distribution of these trader position changes carries important information about liquidity demand in the market. From this distribution of trader position-changes, we construct a marketwide measure for intraday liquidity demand that does not necessarily depend on aggressive trading. Using a rich regulatory dataset on S&P 500 E-mini futures and 10-year Treasury futures markets, we show that this liquidity demand measure has a positive impact on prices. We then decompose our measure of liquidity demand into three components: aggressive, passive and mixed liquidity demand. Passive liquidity demand also has an impact on prices; a one standard deviation increase in passive liquidity demand is associated with 0.5 tick rise in prices for S&P 500 E-mini futures. In addition, we find that new information is incorporated into the prices when passive liquidity demanders take positions. By providing direct evidence, we contribute to the growing literature on the impact of passive limit orders.

JEL Classification: G10, G13, G14

Suggested Citation

Onur, Esen and Roberts, John Spencer and Tuzun, Tugkan, Trader Positions and Marketwide Liquidity Demand (October, 2017). FEDS Working Paper No. 2017-103, Available at SSRN: https://ssrn.com/abstract=3049205 or http://dx.doi.org/10.17016/FEDS.2017.103

Esen Onur (Contact Author)

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

John Spencer Roberts

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

Tugkan Tuzun

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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