Limit Order Books and Trade Informativeness

35 Pages Posted: 4 Feb 2011 Last revised: 7 Feb 2011

See all articles by Helena M. Beltran-Lopez

Helena M. Beltran-Lopez

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Joachim Grammig

Eberhard Karls Universitaet Tübingen; Centre for Financial Research (CfR); Center for Financial Studies (CfS)

Date Written: March 15, 2006

Abstract

In the microstructure literature, information asymmetry is an important determinant of market liquidity. The classic setting is that uninformed dedicated liquidity suppliers charge price concessions when incoming market orders are likely to be informationally motivated. In limit order book markets, however, this relationship is less clear, as market participants can switch roles, and freely choose to immediately demand or patiently supply liquidity by submitting either market or limit orders. We study the importance of information asymmetry in limit order books based on a recent sample of thirty German DAX stocks. We find that \cpos{hasbrouck91a} measure of trade informativeness Granger-causes book liquidity, in particular that required to fill large market orders. Picking-off risk due to public news induced volatility is more important for top-of-the book liquidity supply. In our multivariate analysis we control for volatility, trading volume, trading intensity and order imbalance to isolate the effect of trade informativeness on book liquidity.

Keywords: Informational content of trades, limit order book

JEL Classification: G10

Suggested Citation

Beltran-Lopez, Helena M. and Menkveld, Albert J. and Grammig, Joachim, Limit Order Books and Trade Informativeness (March 15, 2006). EFA 2005 Moscow Meetings. Available at SSRN: https://ssrn.com/abstract=675665 or http://dx.doi.org/10.2139/ssrn.675665

Helena M. Beltran-Lopez (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
1348 Louvain-la-Neuve, 1348
Belgium

Albert J. Menkveld

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Joachim Grammig

Eberhard Karls Universitaet Tübingen ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

HOME PAGE: http://www.uni-tuebingen.de/uni/wwo/Grammig/grammigeng.html

Centre for Financial Research (CfR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Center for Financial Studies (CfS) ( email )

Taunusanlage 6
Frankfurt/Germany, D-60329
Germany

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