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Liquidity Supply and Demand: Empirical Evidence from the Vancouver Stock Exchange

Author

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  • Burton Hollifield
  • Robert Miller
  • Patrik Sandas
  • Joshua Slive

Abstract

We analyze the costs and benefits of providing and using liquidity in a limit order market. Using a large and comprehensive data set which details the complete histories of orders and trades on the Vancouver Stock Exchange, we are able to model the order flow and measure market liquidity as it changes over time. We accomplish this by constructing a measure of the expected net payoffs to demanding or supplying liquidity, and using our data on order arrivals and placement decisions to make inferences about the traders' demand for liquidity and the cost of entering orders in the market. Our results show that liquidity demand is indeed time varying, and is related to several key observable measures of market characteristics. Furthermore, we find evidence of unexploited profit opportunities in the market, perhaps implying that traders do not continuously monitor the market for profitable trades.

Suggested Citation

  • Burton Hollifield & Robert Miller & Patrik Sandas & Joshua Slive, "undated". "Liquidity Supply and Demand: Empirical Evidence from the Vancouver Stock Exchange," GSIA Working Papers 1999-E19, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:284
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    File URL: http://chinook.tepper.cmu.edu/vse_liquidity_main.pdf
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    Cited by:

    1. Bae, Kee-Hong & Jang, Hasung & Park, Kyung Suh, 2003. "Traders' choice between limit and market orders: evidence from NYSE stocks," Journal of Financial Markets, Elsevier, vol. 6(4), pages 517-538, August.
    2. Hans Degryse & Frank De Jong & Maarten Van Ravenswaaij & Gunther Wuyts, 2005. "Aggressive Orders and the Resiliency of a Limit Order Market," Review of Finance, European Finance Association, vol. 9(2), pages 201-242.
    3. Ranaldo, Angelo, 2004. "Order aggressiveness in limit order book markets," Journal of Financial Markets, Elsevier, vol. 7(1), pages 53-74, January.
    4. Verhoeven, Peter & Ching, Simon & Guan Ng, Hock, 2004. "Determinants of the decision to submit market or limit orders on the ASX," Pacific-Basin Finance Journal, Elsevier, vol. 12(1), pages 1-18, January.
    5. Lorne N. Switzer & Haibo Fan, 2010. "Limit Orders, Trading Activity, and Transactions Costs in Equity Futures in an Electronic Trading Environment," International Econometric Review (IER), Econometric Research Association, vol. 2(1), pages 11-35, April.

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