Disappearing Liquidity: Why It Matters and How to Deal with It

30 Pages Posted: 11 Dec 2017 Last revised: 16 Dec 2017

See all articles by Olena Nikolsko-Rzhevska

Olena Nikolsko-Rzhevska

University of Memphis - Finance

Alex Nikolsko‐Rzhevskyy

Lehigh University - Business School

Date Written: December 6, 2017

Abstract

We address the concerns surrounding fast-disappearing liquidity and its effects on both the market and the order placement behavior of slow traders. We find that in response to an increase in short-lived cancellations, slow traders submit fewer and less aggressive orders, thus being at a disadvantage. Nevertheless, our results show that both fast and slow cancellations have a positive effect on the market overall, reducing spread and price volatility, and increasing depth. Since we do not advocate limiting fast cancellations, we develop a framework that allows traders to differentiate between a firm and a phantom quote with 67% success, thus increasing the fill rate of their orders.

Keywords: NASDAQ, ITCH, algorithmic trading, order cancellations, liquidity provision, market quality, phantom liquidity

JEL Classification: G10, G14, G18, G40

Suggested Citation

Nikolsko-Rzhevska, Olena and Nikolsko-Rzhevskyy, Alex, Disappearing Liquidity: Why It Matters and How to Deal with It (December 6, 2017). Available at SSRN: https://ssrn.com/abstract=3083287 or http://dx.doi.org/10.2139/ssrn.3083287

Olena Nikolsko-Rzhevska

University of Memphis - Finance ( email )

United States

Alex Nikolsko-Rzhevskyy (Contact Author)

Lehigh University - Business School ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

HOME PAGE: http://www.nikolsko-rzhevskyy.com

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