Liquidity supply in electronic markets

Michael Aitken, Niall Almeida, Frederick H. Frederick, Thomas H. McInish*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

24 Citations (Scopus)

Abstract

We examine the supply of liquidity by proprietary trading desks and hedge funds (PTDH) versus mutual funds, index funds, and insurance companies (MII) across ten bid (ask) steps of the limit order book. We document that institutional investors simultaneously supply liquidity at multiple prices in the limit order book. We also find that PTDHs are more price aggressive liquidity suppliers than MIIs, consistent with hypothesized responses to observed changes in the cost and risk of non-execution. We investigate whether these findings are robust to fast versus slow markets, the volatility of daily returns, and aggregate depth relative to daily volume.

Original languageEnglish
Pages (from-to)144-168
Number of pages25
JournalJournal of Financial Markets
Volume10
Issue number2
DOIs
Publication statusPublished - May 2007
Externally publishedYes

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