Trading Aggressiveness and Market Breadth Around Earnings Announcements

Abstract

In a single market, liquidity supply has two dimensions--price measured by the quoted spread, and quantity measured by the quoted depth. A third liquidity dimension, market breath, should be added when multiple markets quote the same security and there are enforceable regulatory penalties for a violation of price priority. We define the breadth of the market as the number of quoting market centers matching the best prices, by side of the market. Regulation NMS introduced a price priority rule mandating that orders be routed to the exchange with the best prices, which, in turn, led to the establishment of high speed communications connections between markets. We study liquidity around earnings announcements for NYSE firms. We find that liquidity suppliers significantly decrease market breath prior to earnings announcements, and that large uninformed liquidity demanders significantly increase their use of Intermarket Sweep Orders (ISOs). ISOs are a more aggressive and expensive trading strategy. In post Regulation NMS markets, we show that market breadth is an important measure of liquidity and significantly affects the level of aggressive trading in the market.