The Shape and Information Content of a Post-MiFID Limit Order Book

32 Pages Posted: 14 Mar 2013

See all articles by Alfonso Dufour

Alfonso Dufour

ICMA Centre, Henley Business School, University of Reading

Satchit Sagade

Nasdaq, Inc.; Leibniz Institute for Financial Research SAFE

Date Written: March 13, 2013

Abstract

The characteristics of the order flow in limit order markets has been significantly altered since the introduction of Market in Financial Instruments Directive. We revisit issues related to the shape of the limit order book and its information content in a post-MiFID world using message level data from London Stock Exchange's electronic limit order book. We find that the top of the limit order book contains less than £20,000 in depth and the slope of the order book is steep near the top. This has not translated into bad execution performance primarily due to a reduction in average trading size. However, we find that there are instances when the limit order book is extremely thin, especially for lower capitalization stocks. We further observe that the limit order book beyond the best quotes contains information about future short-term price changes. This information, however, is short-lived and can be only exploited in an algorithmic trading environment.

Keywords: Limit Order Books, Information Content, MiFID, Transaction Costs, Order Book Slope

JEL Classification: G10

Suggested Citation

Dufour, Alfonso and Sagade, Satchit, The Shape and Information Content of a Post-MiFID Limit Order Book (March 13, 2013). Available at SSRN: https://ssrn.com/abstract=2232700 or http://dx.doi.org/10.2139/ssrn.2232700

Alfonso Dufour

ICMA Centre, Henley Business School, University of Reading ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Satchit Sagade (Contact Author)

Nasdaq, Inc. ( email )

Tullvaktsvägen 15
Stockholm, Stockholm 105 78
Sweden
+4684057967 (Phone)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 176 72222 049 (Phone)

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