Flashes of Trading Intent at the NASDAQ

57 Pages Posted: 22 Mar 2011 Last revised: 19 Jul 2016

Johannes Atle Skjeltorp

Central Bank of Norway

Elvira Sojli

UNSW Business School, School of Banking and Finance; RSM Erasmus University

Wing Wah Tham

Erasmus School of Economics - Econometric Institute

Date Written: May 16, 2012

Abstract

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.

Keywords: Actionable Indication of Interest (IOI); Flash orders; High-frequency Trading; Market quality; Market transparency; Sunshine trading.

JEL Classification: G10, G20, G14

Suggested Citation

Skjeltorp, Johannes Atle and Sojli, Elvira and Tham, Wing Wah, Flashes of Trading Intent at the NASDAQ (May 16, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; Norges Bank Working Paper 17; AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1787418 or http://dx.doi.org/10.2139/ssrn.1787418

Johannes Atle Skjeltorp

Central Bank of Norway ( email )

P.O. Box 1179
Oslo, N-0107
Norway

HOME PAGE: http://www.norges-bank.no/research/skjeltorp/

Elvira Sojli (Contact Author)

UNSW Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://sites.google.com/site/esojli/

RSM Erasmus University ( email )

Finance Department T8-44
Burgemeester Oudlaan 50, PO Box 1738
Rotterdam, 3000DR
Netherlands
0031104082824 (Phone)

HOME PAGE: http://www.rsm.nl/people/elvira-sojli/

Wing Wah Tham

Erasmus School of Economics - Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

HOME PAGE: http://people.few.eur.nl/tham/

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