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Price Impact of Aggressive Liquidity Provision

Author

Listed:
  • Ramazan Gencay

    (Simon Fraser University)

  • Soheil Mahmoodzadeh

    (University of Cambridge - Faculty of Economics)

  • Jakub Rojcek

    (University of Zurich, Department of Banking and Finance; Swiss Finance Institute)

  • Michael C Tseng

    (Simon Fraser University (SFU) - Department of Economics)

Abstract

This paper analyzes brief episodes of high-intensity quotes turnover and revision-"bursts" in quotes-in the U.S. equity market. Such events occur very frequently, around 400 times a day for actively traded stocks. We find significant price impact associated to this market-maker initiated event, about five times higher than during non-burst periods. Bursts in quotes are concurrent with short-lived structural break in the informational relationship between market makers and market takers. During bursts, market makers no longer passively impound information from order flow into quotes---a departure from traditional market microstructure paradigm. Rather, market makers significantly impact prices during bursts in quotes. Further analysis shows that there is asymmetry in adverse selection between the bid and ask sides of the limit order book and only a sub-population of market makers enjoy an informational advantage during bursts. Our results call attention to the need for a new microstructure perspective in understanding modern high-frequency limit order book markets.

Suggested Citation

  • Ramazan Gencay & Soheil Mahmoodzadeh & Jakub Rojcek & Michael C Tseng, 2016. "Price Impact of Aggressive Liquidity Provision," Swiss Finance Institute Research Paper Series 16-21, Swiss Finance Institute, revised May 2016.
    • Handle: RePEc:chf:rpseri:rp1621
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    File URL: http://ssrn.com/abstract=2745342
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    Cited by:

    1. Gradojevic, Nikola & Erdemlioglu, Deniz & Gençay, Ramazan, 2017. "Informativeness of trade size in foreign exchange markets," Economics Letters, Elsevier, vol. 150(C), pages 27-33.

    More about this item

    Keywords

    Price Impact; Burst; High-Frequency Trading; Market Quality; Adverse Selection;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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