Abstract
This paper studies how liquidity evolves in a limit order market. By considering the determinants and consequences of the limit and market orders submission, we find that the tradeoff between limit orders and market orders depends on liquidity supply, proxy by the limit order size and the bid-ask spread. We find that increase in limit orders attract market orders, which increase the liquidity demand. Spread only has a significant negative effect on the market orders. Order size only has significant negative effect on the limit orders.
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