Liquidity in an Automated Auction

46 Pages Posted: 5 Jan 2002

See all articles by Mark Coppejans

Mark Coppejans

Barclays Global Investors; BlackRock, Inc

Ian Domowitz

ITG, Inc.; National Bureau of Economic Research (NBER)

Ananth Madhavan

BlackRock, Inc.

Date Written: December 21, 2001


The use of automated auctions to trade equities, derivatives, bonds and foreign exchange has increased dramatically in recent years. Trading in automated auctions occurs through an electronic limit order book without the need for dealers. Automated auctions offer advantages of speed and simplicity, but depend on public limit orders for liquidity. To the extent that liquidity varies over time, it affects trading costs, volatility, and induces strategic behavior by traders. Time variation in liquidity is also of considerable importance because liquidity affects expected returns. This paper uses data from an automated futures market to analyze the dynamic relation between market liquidity, returns, and volatility. Several new results emerge. We document wide intertemporal variation in aggregate market liquidity, measured by the depth of the limit order book at a point in time. Discretionary traders trade in high liquidity periods, reinforcing the concentration of volume and liquidity at certain points in time. Our results are consistent with models where liquidity is a factor in expected returns, but also suggest more complicated dynamics consonant with supply and demand imbalances in the market. While increases in liquidity substantially reduce volatility, volatility shocks reduce liquidity over the short-run, impairing price efficiency. These effects dissipate quickly, however, and their magnitudes are small, indicating a high degree of market resiliency.

Keywords: Electronic trading, liquidity, execution costs, return dynamics

JEL Classification: G10, G34

Suggested Citation

Coppejans, Mark T. and Coppejans, Mark T. and Domowitz, Ian H. and Madhavan, Ananth, Liquidity in an Automated Auction (December 21, 2001). Available at SSRN: or

Mark T. Coppejans

Barclays Global Investors ( email )

45 Fremont Street
San Francisco, CA 94105
United States

BlackRock, Inc ( email )

San Francisco, CA
United States

Ian H. Domowitz (Contact Author)

ITG, Inc. ( email )

380 Madison Avenue, 4th Floor
Electronic Market Initiatives
New York, NY 10017
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ananth Madhavan

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

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