Order Flow Toxicity under the Microscope

45 Pages Posted: 18 Nov 2019 Last revised: 13 Jun 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: June 13, 2021

Abstract

We empirically examine which components of modern markets’ message traffic are effective advanced indicators of impending illiquidity shortfalls. Using detailed message-level data from the National Stock Exchange (NSE) of India that flags the messages of HFTs, agency ATs, and non-ATs, we show that, after controlling for volume, volatility, and other traders’ activity, only the HFTs’ net buying pressure, computed from the inflow of both aggressive and non-aggressive orders, signals toxicity, and precedes increases in both immediacy costs and price impact in the short run. Consistent with theories of active risk management, cancellations and revision of outstanding limit orders add to the overall signaling capacity of the HFTs’ net buying pressure. Market-wide indicators of the HFTs’ net buying pressure add extra power in anticipating single-stock liquidity falls.

Keywords: Order flow, toxicity, order imbalance, HFT, limit orders, market orders, cancelations, monitoring, market liquidity.

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 Toxicity under the Microscope (June 13, 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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