When do informed traders provide liquidity?

41 Pages Posted: 20 Aug 2013 Last revised: 24 Jan 2019

See all articles by Tālis J. Putniņš

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Date Written: January 21, 2018

Abstract

With the demise of traditional market makers and proliferation of trade execution algorithms that mix market and limit orders, it is no longer clear who provides liquidity in limit order book markets and what determines their liquidity provision decisions. To examine these issues, we develop and validate two empirical measures of informed traders’ order choice. We find that informed traders tend to provide liquidity with limit orders during periods of high uncertainty about the fundamental value (high volatility, wide spreads). At such times, mispricing persists for longer so the informed trade more patiently to obtain better execution prices. Price discovery is slower when informed traders use limit orders and consequently their order choice acts as an uncertainty multiplier.

Keywords: liquidity, price discovery, informed trading, limit order, market order

JEL Classification: G14

Suggested Citation

Putnins, Talis J. and Michayluk, David, When do informed traders provide liquidity? (January 21, 2018). Available at SSRN: https://ssrn.com/abstract=2312330 or http://dx.doi.org/10.2139/ssrn.2312330

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Finance Discipline Group
UTS Business
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

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

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

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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