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Limit order book transparency, execution risk, and market liquidity: Evidence from the Sydney Futures Exchange

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  • Luke Bortoli
  • Alex Frino
  • Elvis Jarnecic
  • David Johnstone

Abstract

This study provides new evidence regarding the effect of limit order book disclosure on trading behavior. The natural experiment affected by the Sydney Futures Exchange in January 2001, when it increased limit order book disclosure from depth at the best bid and ask prices to depth at the three best bid and ask prices is examined. Evidence was found consistent with a change in trading behavior coinciding with the increase in pre‐trade transparency. Consistent with predictions of a theoretical model based on execution risk, a statistically significant decline in depth was found at the best quotes. There is little evidence of an increase in bid‐ask spreads. Further, the proportion of market orders exceeding depth at the best quotes increases in a transparent limit order book, reflecting a reduction in execution risk. The study concludes that in a transparent market, limit order traders charge market order traders a higher premium for execution certainty by withdrawing depth from the best quotes, but not by increasing bid‐ask spreads. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1147–1167, 2006

Suggested Citation

  • Luke Bortoli & Alex Frino & Elvis Jarnecic & David Johnstone, 2006. "Limit order book transparency, execution risk, and market liquidity: Evidence from the Sydney Futures Exchange," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(12), pages 1147-1167, December.
    • Handle: RePEc:wly:jfutmk:v:26:y:2006:i:12:p:1147-1167
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    Cited by:

    1. Liu, Qingfu & Hua, Renhai & An, Yunbi, 2016. "Determinants and information content of intraday bid-ask spreads: Evidence from Chinese commodity futures markets," Pacific-Basin Finance Journal, Elsevier, vol. 38(C), pages 135-148.
    2. Dionigi Gerace & Qigui Liu & Gary Gang Tian & Willa Zheng, 2015. "Call Auction Transparency and Market Liquidity: Evidence from China," International Review of Finance, International Review of Finance Ltd., vol. 15(2), pages 223-255, June.
    3. Tsung-Yu Hsieh, 2015. "Information disclosure and price manipulation during the pre-closing session: evidence from an order-driven market," Applied Economics, Taylor & Francis Journals, vol. 47(43), pages 4670-4684, September.
    4. Wang, Ming-Chang & Cheng, Lee-Young & Ko, Chien-Chuan & Chou, Pang-Ying, 2018. "Does public latency influence market quality? An analysis of pre-trade transparency at the Taiwan futures exchange," The Quarterly Review of Economics and Finance, Elsevier, vol. 70(C), pages 227-240.
    5. Pham, Thu Phuong & Westerholm, P. Joakim, 2013. "A survey of research into broker identity and limit order book," Working Papers 17212, University of Tasmania, Tasmanian School of Business and Economics, revised 16 Oct 2013.
    6. Tseng, Yi-Heng & Chen, Shu-Heng, 2015. "Limit order book transparency and order aggressiveness at the closing call: Lessons from the TWSE 2012 new information disclosure mechanism," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 241-272.
    7. Alex Frino & Dionigi Gerace & Masud Behnia, 2021. "The impact of algorithmic trading on liquidity in futures markets: New insights into the resiliency of spreads and depth," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(8), pages 1301-1314, August.

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