Cross-Asset Market Order Flow, Liquidity, and Price Discovery

57 Pages Posted: 24 Oct 2019

See all articles by Robert Garrison

Robert Garrison

Government of the United States of America - Office of Financial Research

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Mark E. Paddrik

Government of the United States of America - Office of Financial Research

Date Written: October 17, 2019

Abstract

Cross-asset market activity can be a channel through which illiquidity risks originating in one market can propagate to others. This paper examines the complex intra-day linkages between the U.S. equity securities market and the equity derivatives market using high-frequency data on S&P 500 index exchange-traded funds and E-mini futures contracts. The paper finds a positive, but short-lived, relationship between the two markets' order flow activities, which relates to the supply, demand, and withdrawal of liquidity between the two markets. The paper also finds that cross-asset market order flow is a key component of liquidity and price discovery, particularly during periods of market volatility.

Keywords: cross-market arbitrage, order flow, liquidity, market structure, automated markets

JEL Classification: G12, G13, G14

Suggested Citation

Garrison, Robert and Jain, Pankaj K. and Paddrik, Mark Endel, Cross-Asset Market Order Flow, Liquidity, and Price Discovery (October 17, 2019). OFR WP 19-04. Available at SSRN: https://ssrn.com/abstract=3474459 or http://dx.doi.org/10.2139/ssrn.3474459

Robert Garrison

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Mark Endel Paddrik (Contact Author)

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

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