Abstract
Most measures of liquidity assume that the cost of buying and selling is symmetric. This paper analyses liquidity in an open electronic limit order book exchange without market makers, where it is possible to directly measure the impact cost of a market order to buy and to sell. There is clear evidence of liquidity asymmetry on the spot market: large market orders to sell have higher costs compared with buy orders. In an identical microstructure setting, but with no short sales constraints, single stock futures markets show little evidence of liquidity asymmetry. This evidence is consistent with the response of liquidity providers to asymmetric information vis-a-vis informed traders, and implies that short sales constraints are an important source of asymmetry in liquidity.
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