Limit Order Trading and Information Asymmetry: Empirical Evidence About the Evolution of Liquidity on an Order Driven Market

FEMARC Edith Cowan University Working Paper No. 0802

31 Pages Posted: 23 Jul 2008

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Joey Wenling Yang

The University of Western Australia - UWA Business School

Date Written: March 1, 2008

Abstract

This paper is concerned with investigating the order placement behavior of different types of traders on the ASX. We find strong evidence of informed traders use of limit orders, as well as insights into the evolution of liquidity over a trading day. The greatest increase of informed traders use of limit orders is during the last two hours of trading before closing. We also find evidence that the information value processed by informed traders make them more successful in their use of limit orders. This impact is considered substantial as in our sample the volume of limit orders from informed traders under-weighs that of the other traders by a large amount. The order strategy of liquidity traders displays a relatively flat U shaped pattern with more limit orders being used at the opening. It is also found that the pattern of the informed traders order placement shows an increase in the use of market orders. This is a result of the unique trading mechanism which entails a closing call auction as applied on the ASX. Traders that have information about the true value of stocks act on it through the use of market orders before the continuous trading platform closes.

Keywords: Evolution of liquidity, Informed trader, Limit order, Information asymmetry

JEL Classification: G12

Suggested Citation

Allen, David Edmund and Yang, Joey Wenling, Limit Order Trading and Information Asymmetry: Empirical Evidence About the Evolution of Liquidity on an Order Driven Market (March 1, 2008). FEMARC Edith Cowan University Working Paper No. 0802. Available at SSRN: https://ssrn.com/abstract=1163290 or http://dx.doi.org/10.2139/ssrn.1163290

David Edmund Allen (Contact Author)

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

Joey Wenling Yang

The University of Western Australia - UWA Business School ( email )

Crawley, Western Australia 6009
Australia

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