Flashes of Trading Intent at the NASDAQ

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: 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