Order Aggressiveness, Volume and Liquidity in Limit Order Market

Posted: 19 Nov 2004

See all articles by William M. Cheung

William M. Cheung

University of Macau

Frank M. Song

The University of Hong Kong - School of Economics and Finance

Date Written: April 2004

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

Suggested Citation

Cheung, William Ming Yan and Song, Frank M., Order Aggressiveness, Volume and Liquidity in Limit Order Market (April 2004). Available at SSRN: https://ssrn.com/abstract=621421

William Ming Yan Cheung (Contact Author)

University of Macau ( email )

Macau

Frank M. Song

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

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