Abstract
AbstractWe analyze limit order book resiliency following liquidity shocks initiated by large market orders. Based on a unique data set, we investigate whether high‐frequency traders are involved in replenishing the order book. Therefore, we relate the net liquidity provision of high‐frequency traders, algorithmic traders, and human traders around these market impact events to order book resiliency. Although all groups of traders react, our results show that only high‐frequency traders reduce the spread within the first seconds after the market impact event. Order book depth replenishment, however, takes significantly longer and is mainly accomplished by human traders’ liquidity provision.
Highlights
Since the emergence of highly automated trading desks and fully electronic securities markets, academics, regulators, and trading firms argue about the direct and indirect consequences of this technological evolution on modern securities markets
The results of the regression model described in the previous subsection are provided in Table 7, which includes the estimates based on both net liquidity provision (NLP)
We study the liquidity provision and the respective contribution to order book resiliency of high‐frequency traders (HFTs), algorithmic trading (AT), and human traders around market impact events caused by large market orders
Summary
Since the emergence of highly automated trading desks and fully electronic securities markets, academics, regulators, and trading firms argue about the direct and indirect consequences of this technological evolution on modern securities markets. Among the most controversially discussed issues is the impact of high‐frequency traders (HFTs) on market quality in open limit order books (Haferkorn 2017). Proponents of high‐frequency trading (HFT) argue that automated decision making and. Open access funding enabled and organized by Projekt DEAL.
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