The Next Tick on NASDAQ: Does Level Ii Information Matter?

Abstract

The Nasdaq stock market provides information about buying and selling interest in what is called the Level II display. Using a bivariate VAR model of trades and quotes, I assess the effect of Level II prices and depths on short-run quote dynamics. I also determine the influence of individual market makers and electronic networks and find evidence of strategic behavior. Finally, I produce a set of dynamic market price responses to buy and sell orders, and I find that these estimates vary with standard measures of liquidity.

Keywords: Nasdaq, Level II, microstructure, tick

JEL Classification: G14