On the Informational Properties of Trading Networks
Trading Networks, 2017, Econometrics Journal 20(3), S126-S149
29 Pages Posted: 17 Mar 2009 Last revised: 6 Aug 2019
Date Written: September 9, 2009
We apply network analysis to trace patterns of information transmission in an electronic limit order market. If market orders or large executable limit orders are submitted by informed traders, then resulting star-shaped or diamond-shaped patterns – or trading networks – should be associated with large changes in returns, smaller volume, and short duration between trades. In contrast, the execution of small limit orders from uninformed traders should result in networks with many triangular and reciprocal patterns and be associated with smaller changes in returns, larger volume and longer duration between trades. We compute a time series of trading networks using audit trail, transaction-level data for all regular transactions in the September 2008 E-mini S&P 500 futures contract – the cornerstone of price discovery for the S&P 500 Index. We find that network metrics that quantify the shape of a network are statistically significantly related to returns, volatility, volume, and duration.
Keywords: trading networks, financial networks, limit order book, limit order markets
JEL Classification: G12, D82, D83, D85
Suggested Citation: Suggested Citation