The Evolution of Informed Liquidity Provision and Consumption: Evidence from an Order Driven Market

Abstract

We investigate the provision of liquidity by different trader types on the Australian Securities Exchange using data that spans an extended sample period of 2003 to 2012. We find the familiar intraday U-shaped pattern in order volume and frequency where the lunch time session is associated with a lower level of order placement activity. We also find institutional traders use more limit orders than market orders and that their relative use of limit to market orders is higher than retail traders. The use of limit orders by institutional traders has increased substantially in 2009 and reflects the growth in algorithmic and high frequency trading. The size of the orders used by institutional traders is reduced dramatically over the years. The VAR analysis on the order choice of institutional and retail traders shows high tendency of clustering in liquidity provision even after controlling for time-of-the-day effect and market conditions. Market depth affects institutional traders’ order choice but not that of retail traders. When studying the price impact of market orders, we find institutional traders are better informed than retail traders. While we do not find the provision of liquidity by institutional traders to be driven by information for all years, there is some evidence of informational liquidity provision in 2006 and 2009 and it tails off in 2012.

Keywords: Evolution of Liquidity, informed trader, limit order, information asymmetry

JEL Classification: G10, G12, G13