Measuring and Explaining Liquidity on an Electronic Limit Order Book: Evidence from Reuters D2000-2

37 Pages Posted: 11 Jul 2001

See all articles by Jon Danielsson

Jon Danielsson

London School of Economics - Systemic Risk Centre

Richard Payne

City University London - Sir John Cass Business School

Date Written: January 31, 2001

Abstract

This paper is an empirical examination of liquidity determination on an electronic FX broking system. We focus on two facets of liquidity. First we study the dynamics of liquidity supply and demand via event-time order arrival probabilities and calendar-time order entry rates. We demonstrate that the order book is "dynamically illiquid" as subsequent to market order arrival further liquidity is removed from the system. We also show that the proportion of limit orders in order flow increases with volatility. Second we investigate determination of order book depth. We show that, after controlling for repetitive intra-day patterns, buy and sell side depth are uncorrelated. We also find that depth is negatively related to volatility and unexpected volume but positively related to expected volume. These results suggest that liquidity suppliers are risk-averse and are concerned with the possibility of informed trade.

Suggested Citation

Danielsson, Jon and Payne, Richard G., Measuring and Explaining Liquidity on an Electronic Limit Order Book: Evidence from Reuters D2000-2 (January 31, 2001). EFA 2001 Barcelona Meetings, Available at SSRN: https://ssrn.com/abstract=276541 or http://dx.doi.org/10.2139/ssrn.276541

Jon Danielsson (Contact Author)

London School of Economics - Systemic Risk Centre ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44.207.955.6056 (Phone)

HOME PAGE: http://www.riskreasearch.org

Richard G. Payne

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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