City Research Online

Order-to-trade ratios and market liquidity

Friederich, S. & Payne, R. (2015). Order-to-trade ratios and market liquidity. Journal of Banking & Finance, 50, pp. 214-223. doi: 10.1016/j.jbankfin.2014.10.005

Abstract

We study the impact on market liquidity of the introduction of a penalty for high order-to-trade ratios (OTRs), implemented by the Italian Stock Exchange to curtail high-frequency quote submission. We find that the fee is associated with a collapse in the quoted depth of the stocks that make up the bulk of trading in Italian equities and with an increase in price impacts of trading across the treated stocks. Spreads do not change, however. Stocks from a pan-European control sample show no such liquidity changes. Thus, the Italian OTR fee had the effect of making Italian stocks markets more shallow and less resilient. Large stocks are more severely affected than midcaps. We also find evidence of a limited decrease in turnover. Consolidated liquidity, constructed by aggregating across all electronic trading venues for these stocks, decreases just like that on the main exchange. Thus, liquidity was not simply diverted from the main exchange, it was reduced in aggregate.

Publication Type: Article
Additional Information: © 2015, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: High-Frequency Trading; Order-to-trade ratios; Limit order trading; Computerized trading; Italian Stock Exchange
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
SWORD Depositor:
[thumbnail of OTR_v4_7.pdf]
Preview
Text - Accepted Version
Available under License : See the attached licence file.

Download (340kB) | Preview
[thumbnail of Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence]
Preview
Text (Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence) - Other
Download (201kB) | Preview

Export

Add to AnyAdd to TwitterAdd to FacebookAdd to LinkedinAdd to PinterestAdd to Email

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login