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
Date Written: March 1, 2008
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: Suggested Citation