Liquidity, Size and Cycle of Order Flow

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: September 2004

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

Suggested Citation

Cheung, William Ming Yan and Song, Frank M., Liquidity, Size and Cycle of Order Flow (September 2004). Available at SSRN: https://ssrn.com/abstract=621441

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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