Cross-Venue Liquidity Provision: High Frequency Trading and Ghost Liquidity

46 Pages Posted: 10 Apr 2019 Last revised: 13 Feb 2021

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Rudy De Winne

UCLouvain - Louvain Finance

Carole Gresse

Université Paris Dauphine-PSL

Richard Payne

City University London - Sir John Cass Business School

Date Written: August 13, 2020

Abstract

We measure the extent to which consolidated liquidity in modern fragmented equity markets overstates true liquidity due to a phenomenon that we call Ghost Liquidity (GL). GL exists when traders place duplicate limit orders on competing venues, intending for only one of the orders to execute, and when one does execute, duplicates are cancelled. Employing data from 2013 for 91 stocks trading on their primary exchanges and three alternative platforms where order submitters are identified consistently across venues, we find that simply measured consolidated liquidity exceeds true consolidated liquidity due to the existence of GL. On average, for every 100 shares passively traded by a multi-market liquidity supplier on a given venue, around 19 shares are immediately cancelled by the same liquidity supplier on a different venue. Yet the average weight of GL in total consolidated depth, at around 4%, does not outweigh the liquidity benefits of fragmentation. GL is most pronounced for traders with a speed advantage such as high-frequency traders, in stocks exhibiting greater market fragmentation, in stocks where the tick is more likely to be binding, and on non-primary exchanges. Furthermore, GL decreases when the fraction of traders using smart order routing is large. Finally, we show that an increase in GL leads to the execution costs of slow and algo traders increasing, while those of HFTs are unaffected.

Keywords: high frequency trading (HFT), algorithmic trading (AT), fragmentation, ghost liquidity

JEL Classification: G14, G15, G18

Suggested Citation

Degryse, Hans and De Winne, Rudy and Gresse, Carole and Payne, Richard G., Cross-Venue Liquidity Provision: High Frequency Trading and Ghost Liquidity (August 13, 2020). Available at SSRN: https://ssrn.com/abstract=3356695 or http://dx.doi.org/10.2139/ssrn.3356695

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Rudy De Winne

UCLouvain - Louvain Finance ( email )

Belgium
+3265323334 (Phone)

Carole Gresse (Contact Author)

Université Paris Dauphine-PSL ( email )

DRM
Place du Maréchal de Lattre de Tassigny
Paris cedex 16, 75775
France

HOME PAGE: http://www.carolegresse.com

Richard G. Payne

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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