Liquidity, Durations and Bid-Ask Spread in Limit Order Markets
33 Pages Posted: 2 Jan 2019
Date Written: November 20, 2018
The complex pattern of the dependence that exists between liquidity, durations and spread in a limit order market is examined. These relationships evolve during the trading day and can change on an hourly basis. Using intraday data for a NASDAQ 100 stock we confirm that limit orders, placed in five levels on both bid and ask side, provide liquidity and are an important conduit of information flow along with the spread. The bid side and ask side liquidity can play different roles in different trading sessions. Informed traders resort to limit order placement in a controlled fashion by relating it with the trade durations and influencing the trades through the spread. Once information flow is complete, the market is driven by order and trade durations.
Keywords: Liquidity, Durations, Pair Copula Construction, Spread, Limit Order Market
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