Order-flow-based Leading Indicators of Short-term Liquidity Shortfalls

42 Pages Posted: 18 Nov 2019 Last revised: 27 Oct 2021

See all articles by David Abad

David Abad

Universidad de Alicante

Magdalena Massot

Universidad de las Islas Baleares

Samarpan Nawn

Indian Institute of Management Udaipur; CFA Institute

Roberto Pascual

Universidad de las Islas Baleares

José Yagüe

University of Murcia

Date Written: October 26, 2021

Abstract

Which components of the overall message traffic are effective leading indicators of impending liquidity shortfalls? Using detailed message-level data that flags the orders of HFTs (high-frequency traders), agency ATs (algorithmic traders), and non-ATs, we show that, after controlling for volume and volatility, only the HFTs’ net buying pressure, computed from the inflow of both aggressive and non-aggressive orders, precedes increases in both immediacy costs and price impacts in the short run. Consistent with market making theories of active risk management, cancellations and revisions of outstanding limit orders relate to preceding efficient price returns and enhance the overall signaling capacity of the HFTs’ order flow. Market-wide indicators of the HFTs’ net buying pressure add extra power in anticipating single-stock liquidity drops.

Keywords: Order flow, HFT, limit orders, market orders, cancelations, toxicity.

JEL Classification: G10, G11, G14, G15

Suggested Citation

Abad, David and Massot, Magdalena and Nawn, Samarpan and Pascual Gascó, Roberto and Yagüe, José, Order-flow-based Leading Indicators of Short-term Liquidity Shortfalls (October 26, 2021). Available at SSRN: https://ssrn.com/abstract=3474294 or http://dx.doi.org/10.2139/ssrn.3474294

David Abad

Universidad de Alicante ( email )

Campus de San Vicente
Carretera San Vicente del Raspeig
San Vicente del Raspeig, 03690
Spain

Magdalena Massot

Universidad de las Islas Baleares ( email )

Crtra. Valldemossa, km 7.5
Ed. Jovellanos
Palma de Mallorca, Illles Balears 07122
Spain
34 971 172513 (Phone)
34 971 172389 (Fax)

Samarpan Nawn

Indian Institute of Management Udaipur ( email )

Balicha
Udaipur, Rajasthan 313001
India

CFA Institute ( email )

915 East High Street
Charlottesville, VA 22902
United States

Roberto Pascual Gascó (Contact Author)

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

José Yagüe

University of Murcia ( email )

Department of Management and Finance
Campus de Espinardo s/n
Murcia, 30100
Spain
+34 868883862 (Phone)
+34 868887537 (Fax)

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