Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-15T08:30:57.988Z Has data issue: false hasContentIssue false
  • English
  • Français

Flashes of Trading Intent at NASDAQ

Published online by Cambridge University Press:  23 March 2016

Johannes A. Skjeltorp ,
Elvira Sojli  and
Wing Wah Tham
Johannes A. Skjeltorp
Affiliation:
jsk@nbim.no, Norges Bank Investment Management, Oslo 0107, Norway
Elvira Sojli*
Affiliation:
esojli@rsm.nl, Erasmus University, Rotterdam School of Management, Rotterdam 3000DR, The Netherlands
Wing Wah Tham
Affiliation:
tham@ese.eur.nl, Erasmus University, Erasmus School of Economics, Rotterdam 3000DR, The Netherlands and University of New South Wales.
*
*Corresponding author: esojli@rsm.nl
Get access Rights & Permissions [Opens in a new window]

Abstract

We use the introduction and subsequent removal of the flash-order functionality from NASDAQ as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We find that flash orders significantly improve liquidity in NASDAQ. Furthermore, overall market quality improves (deteriorates) when flash functionality is introduced (removed). This result can be attributed to increased competition among liquidity suppliers across competing trading venues. Alternatively, flash orders attract responses from reactive traders immediately after the announcement, attracting more “hidden liquidity” and lowering risk-bearing costs for the overall market.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 1 , February 2016 , pp. 165 - 196
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A., and Pfleiderer, P.. “Sunshine Trading and Financial Market Equilibrium.” Review of Financial Studies, 4 (1991), 443–481.CrossRefGoogle Scholar
Ahn, H.-J.; Bae, K.-H.; and Chan, K.. “Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong.” Journal of Finance, 56 (2001), 767–788.CrossRefGoogle Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Anand, A.; Chakravarty, S.; and Martell, T.. “Empirical Evidence on the Evolution of Liquidity: Choice of Market versus Limit Orders by Informed and Uninformed Traders.” Journal of Financial Markets, 8 (2005), 288–308.CrossRefGoogle Scholar
Anand, A., and Weaver, D.. “Can Order Exposure Be Mandated?” Journal of Financial Markets, 7 (2004), 405–426.CrossRefGoogle Scholar
Angel, J.; Harris, L.; and Spatt, C.. “Equity Trading in the 21st Century.” Quarterly Journal of Finance, 1 (2011), 1–53.CrossRefGoogle Scholar
Bacidore, J., and Sofianos, G.. “Liquidity Provision and Specialist Trading in NYSE-Listed Non-U.S. Stocks.” Journal of Financial Economics, 63 (2002), 133–158.CrossRefGoogle Scholar
Bae, K.-H.; Jang, H.; and Park, K. S.. “Traders’ Choice between Limit and Market Orders: Evidence from NYSE Stocks.” Journal of Financial Markets, 4 (2003), 517–538.CrossRefGoogle Scholar
Barclay, M., and Hendershott, T.. “Price Discovery and Trading after Hours.” Review of Financial Studies, 16 (2003), 1041–1073.CrossRefGoogle Scholar
Barclay, M., and Warner, J. B.. “Stealth Trading and Volatility: Which Trades Move Prices?” Journal of Financial Economics, 34 (1993), 281–305.CrossRefGoogle Scholar
Baruch, S. “Who Benefits from an Open Limit Order Book?” Journal of Business, 78 (2005), 1267–1306.CrossRefGoogle Scholar
Bessembinder, H.; Carrion, A.; Tuttle, L.; and Venkataraman, K.. “Liquidity, Resiliency and Market Quality Around Predictable Trades: Theory and Evidence.” Journal of Financial Economics, forthcoming (2016).CrossRefGoogle Scholar
Bessembinder, H.; Maxwell, W.; and Venkataraman, K.. “Market Transparency, Liquidity Externalities, and Institutional Trading Costs in Corporate Bonds.” Journal of Financial Economics, 82 (2006), 251–288.CrossRefGoogle Scholar
Bessembinder, H.; Panayides, M.; and Venkataraman, K.. “Hidden Liquidity: An Analysis of Order Exposure Strategies in Electronic Stock Markets.” Journal of Financial Economics, 94 (2009), 361–383.CrossRefGoogle Scholar
Bessembinder, H., and Venkataraman, K.. “Does an Electronic Stock Exchange Need an Upstairs Market?” Journal of Financial Economics, 73 (2004), 3–36.CrossRefGoogle Scholar
Biais, B. “Price Formation and Equilibrium Liquidity in Fragmented and Centralized Markets.” Journal of Finance, 48 (1993), 157–185.CrossRefGoogle Scholar
Biais, B.; Glosten, L.; and Spatt, C.. “Market Microstructure: A Survey of Microfoundations, Empirical Results, and Policy Implications.” Journal of Financial Markets, 8 (2005), 217–264.CrossRefGoogle Scholar
Biais, B.; Hillion, P.; and Spatt, C.. “An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse.” Journal of Finance, 50 (1995), 1655–1689.CrossRefGoogle Scholar
Bloomfield, R., and O’Hara, M.. “Market Transparency: Who Wins and Who Loses?” Review of Financial Studies, 12 (1999), 5–35.CrossRefGoogle Scholar
Bloomfield, R., and O’Hara, M.. “Can Transparent Markets Survive?” Journal of Financial Economics, 55 (2000), 425–459.CrossRefGoogle Scholar
Boehmer, E. “Dimensions of Execution Quality: Recent Evidence for U.S. Equity Markets.” Journal of Financial Economics, 78 (2005), 533–582.CrossRefGoogle Scholar
Boehmer, E., and Kelley, E. K.. “Institutional Investors and the Informational Efficiency of Prices.” Review of Financial Studies, 22 (2009), 3563–3594.CrossRefGoogle Scholar
Boehmer, E.; Saar, G.; and Yu, L.. “Lifting the Veil: An Analysis of Pre-Trade Transparency at the NYSE.” Journal of Finance, 60 (2005), 783–815.CrossRefGoogle Scholar
Chakravarty, S., and Holden, C.. “An Integrated Model of Market and Limit Orders.” Journal of Financial Intermediation, 4 (1995), 213–241.CrossRefGoogle Scholar
Choe, H., and Hansch, O.. “Which Trades Move Stock Prices in the Internet Age?” Working Paper, Pennsylvania State University and Seoul National University (2005).Google Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Commonality in Liquidity.” Journal of Financial Economics, 56 (2000), 3–28.CrossRefGoogle Scholar
Chung, K. H., and Zhang, H.. “A Simple Approximation of Intraday Spreads Using Daily Data.” Journal of Financial Markets, 17 (2014), 94–120.CrossRefGoogle Scholar
Dia, M., and Pouget, S.. “Sunshine Trading in an African Stock Market.” Managerial Finance, 37 (2011), 257–274.CrossRefGoogle Scholar
Edwards, A. K.; Harris, L. E.; and Piwowar, M. S.. “Corporate Bond Market Transaction Costs and Transparency.” Journal of Finance, 62 (2007), 1421–1451.CrossRefGoogle Scholar
Ellul, A.; Jain, P.; Holden, C.; and Jennings, R.. “Order Dynamics: Recent Evidence from the NYSE.” Journal of Empirical Finance, 5 (2007), 636–661.CrossRefGoogle Scholar
Eun, C., and Sabherwal, S.. “Cross-Border Listings and Price Discovery: Evidence from U.S.-Listed Canadian Stocks.” Journal of Finance, 58 (2003), 549–576.CrossRefGoogle Scholar
Flood, M. D.; Huisman, R.; Koedijk, K. G.; and Mahieu, R. J.. “Quote Disclosure and Price Discovery in Multiple-Dealer Financial Markets.” Review of Financial Studies, 12 (1999), 37–59.CrossRefGoogle Scholar
Foerster, S., and Karolyi, A.. “International Listings of Stocks: The Case of Canada and the U.S.” Journal of International Business Studies, 24 (1993), 763–784.CrossRefGoogle Scholar
Foucault, T.; Moinas, S.; and Theissen, E.. “Does Anonymity Matter in Electronic Limit Order Markets?” Review of Financial Studies, 20 (2007), 1707–1747.CrossRefGoogle Scholar
Goldstein, M. A.; Hotchkiss, E. S.; and Sirri, E. R.. “Transparency and Liquidity: A Controlled Experiment on Corporate Bonds.” Review of Financial Studies, 20 (2007), 235–273.CrossRefGoogle Scholar
Goyenko, R. Y.; Holden, C. W.; and Trzcinka, C. A.. “Do Liquidity Measures Measure Liquidity?” Journal of Financial Economics, 92 (2009), 153–181.CrossRefGoogle Scholar
Griffiths, M.; Smith, B.; Turnbull, A.; and White, R.. “The Costs and Determinants of Order Aggressiveness.” Journal of Financial Economics, 56 (2000), 65–88.CrossRefGoogle Scholar
Handa, P., and Schwartz, R.. “Limit Order Trading.” Journal of Finance, 5 (1996), 1835–1861.CrossRefGoogle Scholar
Harris, L. “Does a Minimum Price Variation Encourage Order Exposure?” Working Paper, University of Southern California (1996).Google Scholar
Harris, L. “Order Exposure and Parasitic Traders.” Working Paper, University of Southern California (1997).Google Scholar
Hasbrouck, J. “Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data.” Journal of Finance, 64 (2009), 1445–1477.CrossRefGoogle Scholar
Hasbrouck, J. “The Best Bid and Offer: A Short Note on Programs and Practices.” Working Paper, New York University (2010).CrossRefGoogle Scholar
Hasbrouck, J., and Saar, G.. “Limit Orders and Volatility in a Hybrid Market: The Island ECN.” Working Paper, New York University (2004).Google Scholar
Hasbrouck, J., and Saar, G.. “Technology and Liquidity Provision: The Blurring of Traditional Definitions.” Journal of Financial Markets, 12 (2009), 143–172.CrossRefGoogle Scholar
Heckman, J. J.; Ichimura, H.; and Todd, P.. “Matching as an Econometric Evaluation Estimator.” Review of Economic Studies, 65 (1998), 261–294.CrossRefGoogle Scholar
Hendershott, T., and Jones, C. M.. “Island Goes Dark: Transparency, Fragmentation, and Regulation.” Review of Financial Studies, 18 (2005), 743–793.CrossRefGoogle Scholar
Hendershott, T.; Jones, C. M.; and Menkveld, A. J.. “Does Algorithmic Trading Improve Liquidity?” Journal of Finance, 66 (2011), 1–34.CrossRefGoogle Scholar
Imbens, G., and Rubin, D. B.. Causal Inference in Statistics and the Social Sciences. Cambridge, MA: Cambridge University Press (2011).Google Scholar
Jorion, P., and Schwartz, E.. “Integration vs. Segmentation in the Canadian Stock Market.” Journal of Finance, 41 (1986), 603–614.CrossRefGoogle Scholar
Kavajecz, K. “A Specialist’s Quoted Depth and the Limit Order.” Journal of Finance, 54 (1999), 747–771.CrossRefGoogle Scholar
Kyle, A. S. “Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 1315–1335.CrossRefGoogle Scholar
Madhavan, A. “Consolidation, Fragmentation, and the Disclosure of Trading Information.” Review of Financial Studies, 8 (1995), 579–603.CrossRefGoogle Scholar
Madhavan, A. “Security Prices and Market Transparency.” Journal of Financial Intermediation, 5 (1996), 255–283.CrossRefGoogle Scholar
Madhavan, A. “Market Microstructure: A Survey.” Journal of Financial Markets, 3 (2000), 266–283.CrossRefGoogle Scholar
Madhavan, A.; Porter, D.; and Weaver, D.. “Should Securities Markets Be Transparent?” Journal of Financial Markets, 8 (2005), 265–287.CrossRefGoogle Scholar
Moinas, S. “Hidden Limit Orders and Liquidity in Limit Order Markets.” Working Paper, Toulouse University (2006).CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
O’Hara, M. Market Microstructure Theory. Cambridge, MA: Blackwell Publishers (1995).Google Scholar
O’Hara, M. “What Is a Quote?” Journal of Trading, 5 (2010), 10–16.CrossRefGoogle Scholar
O’Hara, M., and Ye, M.. “Is Market Fragmentation Harming Market Quality?” Journal of Financial Economics, 100 (2011), 459–474.CrossRefGoogle Scholar
Pagano, M., and Röell, A.. “Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading.” Journal of Finance, 51 (1996), 579–612.CrossRefGoogle Scholar
Ranaldo, A. “Order Aggressiveness in Limit Order Book Markets.” Journal of Financial Markets, 7 (2004), 53–74.CrossRefGoogle Scholar
Rosenbaum, P., and Rubin, D. B.. “The Central Role of the Propensity Score in Observational Studies for Causal Effects.” Biometrika, 70 (1983), 41–55.CrossRefGoogle Scholar
Schoeneborn, T., and Schied, A.. “Liquidation in the Face of Adversity: Stealth vs. Sunshine Trading, Predatory Trading vs. Liquidity Provision.” Working Paper, University of Munich (2009).Google Scholar
Thompson, S. “Simple Formulas for Standard Errors That Cluster by Both Firm and Time.” Journal of Financial Economics, 99 (2010), 1–10.CrossRefGoogle Scholar
Supplementary material: PDF

Skjeltorp supplementary material

Internet Appendix

Download Skjeltorp supplementary material(PDF)
PDF 177.1 KB