Liquidity Dynamics in an Electronic Open Limit Order Book: an Event Study Approach

Authors


  • Earlier versions of this paper were circulated under the title ‘Zooming in on Liquidity’. We thank Deutsche Börse AG for providing the data. We thank an anonymous referee, Pierre Giot, Joachim Grammig, Alexander Kempf, participants of the 31st annual meeting of the European Finance Association, of the 11th annual meeting of the German Finance Association, of the 9th Symposium on Finance, Banking and Insurance in Karlsruhe and seminar participants at the University of St. Gallen and the University of Exeter for valuable comments. Correspondence: Erik Theissen.

Abstract

We analyse the dynamics of liquidity in an electronic limit order book using the Exchange Liquidity Measure (XLM), a measure of the cost of a roundtrip trade of given size V. We use intraday event study methodology to analyse how liquidity shocks - large transactions and Bloomberg ticker news - affect the XLM. We find that resiliency after large transactions is high, i.e., liquidity quickly reverts to ‘normal’ levels. Large trades are ‘timed’; they take place at times when liquidity is unusually high. Bloomberg ticker news items do not have a discernible effect on liquidity.

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