Phantom Liquidity and High Frequency Quoting

Journal of Trading, Vol. 11, No. 3, 6-15, 2016.

20 Pages Posted: 9 May 2016 Last revised: 7 Jul 2016

See all articles by Jesse Blocher

Jesse Blocher

Vanderbilt University - Finance

Ricky Cooper

Illinois Institute of Technology - Stuart School of Business, IIT

Jonathan Seddon

Audencia Nantes School of Management

Ben Van Vliet

Illinois Institute of Technology - Stuart School of Business

Date Written: May 6, 2016

Abstract

This paper examines every NASDAQ ITCH feed message for the S&P 500 stocks for 2012 and identifies clusters of extremely high and extremely low limit order cancellation activity. We find results consistent with the ideas that cancel clusters are the result of high frequency traders jockeying for queue position and reacting to information to establish a new price level. Furthermore, few trades seem to be executed during cancel clusters or even immediately after them. Low cancellation activity seems to be markedly different with many level changes all be caused by executions. Our results are consistent with high frequency trading firms behaving as agents who bring efficiency to the market without the need to have executions at intermediate prices. We also discuss the misconception that investors and low frequency trader are synonymous and its implications for policy given our results.

Keywords: high frequency trading, phantom liquidity, limit order markets

Suggested Citation

Blocher, Jesse and Cooper, Ricky and Seddon, Jonathan and Van Vliet, Ben, Phantom Liquidity and High Frequency Quoting (May 6, 2016). Journal of Trading, Vol. 11, No. 3, 6-15, 2016.. Available at SSRN: https://ssrn.com/abstract=2776745

Jesse Blocher

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Ricky Cooper

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

10 West 35th Street, 18th Floor
Chicago, IL 60616
United States

Jonathan Seddon

Audencia Nantes School of Management ( email )

8 Route de la Joneliere
Nantes Cedex 3, Cedex 3 44312
France

Ben Van Vliet (Contact Author)

Illinois Institute of Technology - Stuart School of Business ( email )

Stuart Graduate School of Business
565 W. Adams St.
Chicago, IL 60661
United States

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