Liquidity determination in an order-driven market |
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Authors: | Jón Daníelsson |
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Institution: | Department of Finance and Financial Markets Group , London School of Economics , Houghton Street, London , WC2A 2AE , UK |
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Abstract: | We exploit full order level information from an electronic FX broking system to provide a comprehensive account of the determination of its liquidity. We not only look at bid-ask spreads and trading volumes, but also study the determination of order entry rates and depth measures derived from the entire limit order book. We find strong predictability in the arrival of liquidity supply/demand events. Further, in times of low (high) liquidity, liquidity supply (demand) events are more common. In times of high trading activity and volatility, the ratio of limit to market order arrivals is high but order book spreads and depth deteriorate. These results are consistent with market order traders having better information than limit order traders. |
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Keywords: | market microstructure foreign exchange exchange rates |
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