Intraday Liquidity Provision by Trader Types in a Limit Order Market: Evidence from Taiwan Index Futures

Authors

  • Junmao Chiu,

    1. Junmao Chiu is a Ph.D. Associate at the Graduate Institute of Finance, National Chiao Tung University, Taiwan
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  • Huimin Chung,

    1. Huimin Chung is a Professor of Finance at the Graduate Institute of Finance, National Chiao Tung University, Taiwan
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  • George H. K. Wang

    Corresponding author
    1. George H. K. Wang is the Research Professor of Finance at the School of Management, George Mason University, Fairfax, Virginia
    • Correspondence author, School of Management, George Mason University, 4400 University Drive, Fairfax, Virginia 22030. Tel: 703-993-3415, Fax: 703-993-1870, e-mail: gwang2@gmu.edu

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  • The authors would like to thank the anonymous referee and Robert Webb (the editor) for their constructive comments and suggestions that significantly improved the quality of the study. An earlier version of this study was presented at the 2011 Financial Management Association Annual Meetings, in Denver, Colorado. The 4th NCTU International Finance Conference, in Hsinchu, Taiwan, and The AsianFA and TFA 2012 Joint International Conference, in Taipei, Taiwan.
  • A part of this work was done when Junmao Chiu was a visiting scholar in the Finance area, School of Management, George Mason University, Fairfax, VA 22030.

Abstract

This study examines the dynamic liquidity provision process by institutional and individual traders in the Taiwan index futures market, which is a pure limit order market. The empirical analysis obtains several interesting empirical results. We find that trader type affects liquidity provision in a number of interesting ways. First, although institutional traders use more limit orders than market orders, foreign institution (individual) traders use a relatively higher percentage of market (limit) orders in the early trading session and then switch to more limit (market) orders for the remainder of the day until close to the end of the trading day. Second, net limit order submissions by both institutional and individual traders are positively related to one-period lagged transitory volatility and negatively related to informational volatility. Third, net limit order submissions by institutional traders are positively related to one-period lagged spread. Finally, both the state of limit order book and order size significantly influence all types of traders’ strategy on submission of limit order versus market order during the intraday trading session. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 34:145–172, 2014

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