Information Contents of Trade and Quote Imbalances, and the Hypothesis of Reverse Liquidity: Evidence from a Fully Automated Exchange

52 Pages Posted: 19 Jul 2004

See all articles by Christopher Ting

Christopher Ting

Singapore Management University - Lee Kong Chian School of Business

Date Written: March 15, 2004

Abstract

In this paper, we study the information contents of imbalances in trades and quotes emanated from an exchange resembling the one envisioned by Black (1971). We find dollar volume is more informative than number in measuring daily trading and quoting activities. Our measure of quote imbalance permits an investigation on the information asymmetry between market and limit orders. In case insider trading does not occur regularly, we present a hypothesis of reverse liquidity as an alternative interpretation of our empirical findings. It could be that market-order traders charge an implicit liquidity premium for fulfilling the contrarian trading demand of limit-order traders. We suspect proprietary traders are filling the vacuum created by the absence of designated market makers and they provide reverse liquidity through their active trading.

Suggested Citation

Ting, Christopher, Information Contents of Trade and Quote Imbalances, and the Hypothesis of Reverse Liquidity: Evidence from a Fully Automated Exchange (March 15, 2004). Available at SSRN: https://ssrn.com/abstract=565327 or http://dx.doi.org/10.2139/ssrn.565327

Christopher Ting (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford
Singapore, 178899
Singapore

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