TY - JOUR
T1 - Empirical evidence on the evolution of liquidity
T2 - Choice of market versus limit orders by informed and uninformed traders
AU - Anand, Amber
AU - Chakravarty, Sugato
AU - Martell, Terrence
N1 - Funding Information:
We thank an anonymous referee and Avanidhar Subrahmanyam (the editor), seminar participants at Purdue and the FMA 2002 meetings, Mara Faccio, Aloke Ghosh, Tim McCormick, Gideon Saar, Robert Schwartz, Kumar Venkataraman, Dan Weaver and Avner Wolf for their comments. A previous version of this paper was entitled “Informed Limit Order Trading.” Anand gratefully acknowledges financial support for this study from a Nasdaq Educational Foundation grant while Chakravarty acknowledges financial support from the Purdue Research Foundation. The usual disclaimer applies.
PY - 2005/8
Y1 - 2005/8
N2 - We empirically investigate the evolution of liquidity, as well as the changing strategies of informed traders, over the course of the trading day. In particular, we empirically examine the relative use of market versus limit orders by informed and liquidity traders early versus later in the trading day using detailed order and audit trail data from the NYSE. Our study complements experimental research that shows that informed traders tend to take liquidity earlier in the trading day while acting as liquidity suppliers later in the day. We find that informed (i.e., institutional) traders actually use market orders more often in the first half of the day than the second. We also find support for informed traders' use of limit orders. Limit orders placed by informed traders perform better than those placed by uninformed (i.e., individual) traders. Our findings serve to underscore the importance of developing new theoretical models to more accurately reflect the changing and complex trading milieu.
AB - We empirically investigate the evolution of liquidity, as well as the changing strategies of informed traders, over the course of the trading day. In particular, we empirically examine the relative use of market versus limit orders by informed and liquidity traders early versus later in the trading day using detailed order and audit trail data from the NYSE. Our study complements experimental research that shows that informed traders tend to take liquidity earlier in the trading day while acting as liquidity suppliers later in the day. We find that informed (i.e., institutional) traders actually use market orders more often in the first half of the day than the second. We also find support for informed traders' use of limit orders. Limit orders placed by informed traders perform better than those placed by uninformed (i.e., individual) traders. Our findings serve to underscore the importance of developing new theoretical models to more accurately reflect the changing and complex trading milieu.
KW - Electronic limit order markets
KW - Hidden limit orders
KW - Market quality
KW - TSX
KW - Trader behavior
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U2 - 10.1016/j.finmar.2005.03.001
DO - 10.1016/j.finmar.2005.03.001
M3 - Article
AN - SCOPUS:22644444462
SN - 1386-4181
VL - 8
SP - 288
EP - 308
JO - Journal of Financial Markets
JF - Journal of Financial Markets
IS - 3
ER -