Order Aggressiveness, Volume and Liquidity in Limit Order Market

Abstract

We examine the use of trading activity in explaining spread in a pure order-driven market, the Hong Kong Stock Exchange. We found that the intraday spread exhibit 2 U-shaped patterns in morning and afternoon. Our results show that in limit order market, volume is relatively more efficient in reflecting economy of scale in transaction cost, than that of asymmetric information as it has significant negative effect on spread. We introduce the trade aggressiveness as alternative measure of trading activity and argue it works better in reflecting degree of asymmetric information among traders as it has positive effect on spread. Furthermore, the estimated order processing component in spread is about 33% while the estimated asymmetric information component is only 14%, suggesting that order processing cost is the major binding component of spread in limit order market.

Keywords: Limit order, volume, liquidity

JEL Classification: G14