Liquidity, Size and Cycle of Order Flow

Abstract

We investigate the order flow composition of an order-driven market, the Hong Kong Stock Exchange. We examine the effect of different market status and time-of-a-day factor on Cycle of Order Flow and derive useful hypotheses. We find that increase in number of limit orders attracts trades, then this consumption of liquidity attracts limit orders, which completes the cycle of order flow. The number of block trading increases with more limit order at or within the quote while the number of small size trading decreases with limit orders available within the quote. The spread has a significant negative effect on number of market orders while the order size has significant negative effect on the number of limit orders. Empirical results support the hypothesis that the choice between limit and market order depends on the information asymmetry, market status and the time.

Keywords: Liquidity, order flow, limit order, market order

JEL Classification: G14