The Shape and Information Content of a Post-MiFID Limit Order Book

Abstract

The characteristics of the order flow in limit order markets has been significantly altered since the introduction of Market in Financial Instruments Directive. We revisit issues related to the shape of the limit order book and its information content in a post-MiFID world using message level data from London Stock Exchange's electronic limit order book. We find that the top of the limit order book contains less than £20,000 in depth and the slope of the order book is steep near the top. This has not translated into bad execution performance primarily due to a reduction in average trading size. However, we find that there are instances when the limit order book is extremely thin, especially for lower capitalization stocks. We further observe that the limit order book beyond the best quotes contains information about future short-term price changes. This information, however, is short-lived and can be only exploited in an algorithmic trading environment.