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Order Imbalance and Its Impact on Market Performance: Order‐driven vs. Quote‐driven Markets

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  • Yu Chuan Huang
  • Jian‐Hsin Chou

Abstract

The behavior of order imbalance and its impact on market performance at the two Taiwan stock index futures markets, the TAIFEX and the SGX‐DT, is investigated. The TAIFEX is an order‐driven call market, while the SGX‐DT uses a quote‐driven continuous trading system. Our empirical results show that for the TAIFEX order‐driven market, the spread is minimized when order imbalance is high. In contrast, for the SGX‐DT quote‐driven market, the spread is highest when order imbalance is high. For both markets, order imbalance has an impact on market liquidity and volatility. The impact is larger and more significant for SGX‐DT futures. This suggests that the order‐driven market mechanism of TAIFEX futures is superior in absorbing order imbalance and in reducing the resulting price impact.

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  • Yu Chuan Huang & Jian‐Hsin Chou, 2007. "Order Imbalance and Its Impact on Market Performance: Order‐driven vs. Quote‐driven Markets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9‐10), pages 1596-1614, November.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:9-10:p:1596-1614
    DOI: 10.1111/j.1468-5957.2007.02038.x
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    1. Kaun Y. Lee & Kee H. Chung, 2009. "Information-Based Trading and Price Improvement," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 754-773.
    2. Lien, Donald & Hung, Pi-Hsia & Lin, Zong-Wei, 2020. "Whose trades move stock prices? Evidence from the Taiwan Stock Exchange," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 25-50.
    3. Lin, Emily & Lee, Cheng-Few & Wang, Kehluh, 2013. "Futures mispricing, order imbalance, and short-selling constraints," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 408-423.
    4. Zi Ning & Yiuman Tse, 2009. "Order Imbalance in the FTSE Index Futures Market: Electronic versus Open Outcry Trading," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 230-252, January.
    5. Kaun Y. Lee & Kee H. Chung, 2009. "Information‐Based Trading and Price Improvement," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5‐6), pages 754-773, June.
    6. Cheoljun Eom & Steven J. Jordan & Woo‐Baik Lee & Jong Won Park, 2020. "Programs trades and trade regulation: An evidence of the Korean securities market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 44-66, January.
    7. Chiu, Junmao & Chung, Huimin & Ho, Keng-Yu & Wu, Chih-Chiang, 2018. "Investor sentiment and evaporating liquidity during the financial crisis," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 21-36.

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