Order Imbalance and Liquidity Supply: Evidence from the Bubble Burst of NASDAQ Stocks

36 Pages Posted: 10 May 2005

See all articles by Mingsheng Li

Mingsheng Li

Bowling Green State University - College of Business Administration

Tim McCormick

U.S. Securities and Exchange Commission

Xin Zhao

Pennsylvania State University (Erie) - The Behrend College

Abstract

In this study we analyze the effect of order imbalance on the quotation behavior of Nasdaq market makers. We find that Nasdaq market makers use both price and quantity quotes when dealing with order imbalances. However, order imbalance affects only price movement, not spreads. We also find that Nasdaq market makers quote more shares and compete more intensively on bid-side (ask-side) when public sells (buys) exceed public buys (sells). These suggest that market makers increase liquidity supply when order imbalances exist. More interestingly, we show that both market conditions and price movements affect investors' trading behavior.

Keywords: Order imbalance, liquidity, spreads, depths, market makers

JEL Classification: G12, G14

Suggested Citation

Li, Mingsheng and McCormick, Tim and Zhao, Xin Jessica, Order Imbalance and Liquidity Supply: Evidence from the Bubble Burst of NASDAQ Stocks. Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=716442

Mingsheng Li (Contact Author)

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Tim McCormick

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
United States
202-551-6633 (Phone)

Xin Jessica Zhao

Pennsylvania State University (Erie) - The Behrend College ( email )

286 Burke
Erie, PA 16563-1400
United States

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