Flashes of Trading Intent at the NASDAQ
Johannes Atle Skjeltorp
Central Bank of Norway
UNSW Business School, School of Banking and Finance; RSM Erasmus University
Wing Wah Tham
Erasmus School of Economics - Econometric Institute
May 16, 2012
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
Norges Bank Working Paper 17
AFA 2012 Chicago Meetings Paper
We use the introduction and subsequent removal of the flash order functionality from NASDAQ as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We find that flash orders significantly improve liquidity in NASDAQ. Furthermore, overall market quality improves (deteriorates) when the flash functionality is introduced (removed). This result can be attributed to increased competition among liquidity suppliers across competing trading venues. Alternatively, flash orders attract responses from reactive traders immediately after the announcement, attracting more \hidden liquidity" and lowering risk-bearing costs for the overall market.
Number of Pages in PDF File: 57
Keywords: Actionable Indication of Interest (IOI); Flash orders; High-frequency Trading; Market quality; Market transparency; Sunshine trading.
JEL Classification: G10, G20, G14
Date posted: March 22, 2011 ; Last revised: July 19, 2016