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

40 Pages Posted: 10 Apr 2019 Last revised: 14 Aug 2019

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

Carole Gresse

Université Paris-Dauphine, PSL

Richard Payne

City University London - Sir John Cass Business School

Date Written: August 7, 2019

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. By 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, i.e., slightly more than 4%, does not challenge the liquidity benefits of fragmentation. GL can however reach substantial levels for some categories of stocks, traders, and platforms, namely larger and less volatile stocks, high-frequency traders (HFTs), and non-primary exchanges. The greatest GL is observed for the HFTs who mostly behave as liquidity takers, on more heavily traded and less volatile stocks, across alternative platforms.

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 7, 2019). 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 ( email )

Chaussée de Binche, 151
Mons, 7000
Belgium
+3265323334 (Phone)

Carole Gresse (Contact Author)

Université Paris-Dauphine, PSL ( email )

DRM
Pôle Universitaire Léonard de Vinci
Paris La Défense cedex, 92916
France
+33 (0)1 41 16 76 15 (Phone)
+33 (0)1 41 16 76 37 (Fax)

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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