The Evolution of Informed Liquidity Provision and Consumption: Evidence from an Order Driven Market

38 Pages Posted: 1 Feb 2013

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Marvin Wee

Australian National University (ANU); Financial Research Network (FIRN)

Joey (Wenling) Yang

The University of Western Australia

Date Written: January 2013

Abstract

We investigate the provision of liquidity by different trader types on the Australian Securities Exchange using data that spans an extended sample period of 2003 to 2012. We find the familiar intraday U-shaped pattern in order volume and frequency where the lunch time session is associated with a lower level of order placement activity. We also find institutional traders use more limit orders than market orders and that their relative use of limit to market orders is higher than retail traders. The use of limit orders by institutional traders has increased substantially in 2009 and reflects the growth in algorithmic and high frequency trading. The size of the orders used by institutional traders is reduced dramatically over the years. The VAR analysis on the order choice of institutional and retail traders shows high tendency of clustering in liquidity provision even after controlling for time-of-the-day effect and market conditions. Market depth affects institutional traders’ order choice but not that of retail traders. When studying the price impact of market orders, we find institutional traders are better informed than retail traders. While we do not find the provision of liquidity by institutional traders to be driven by information for all years, there is some evidence of informational liquidity provision in 2006 and 2009 and it tails off in 2012.

Keywords: Evolution of Liquidity, informed trader, limit order, information asymmetry

JEL Classification: G10, G12, G13

Suggested Citation

Allen, David Edmund and Wee, Marvin and Yang, Joey (Wenling), The Evolution of Informed Liquidity Provision and Consumption: Evidence from an Order Driven Market (January 2013). Available at SSRN: https://ssrn.com/abstract=2210304 or http://dx.doi.org/10.2139/ssrn.2210304

David Edmund Allen

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

Marvin Wee

Australian National University (ANU) ( email )

The Australian National University
College of Business and Economics
Canberra, 2601
Australia
+61 2 61250416 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Joey (Wenling) Yang (Contact Author)

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
AUSTRALIA

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