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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Price Impact of Aggressive Liquidity Provision |
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| Authors |
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| Institution | University of Zurich |
| Series Name | Swiss Finance Institute Research Paper |
| Number | 16-21 |
| Date | 2016 |
| Abstract Text | This paper analyzes brief episodes of high-intensity quotes turnover and revision-"bursts" in quotes-in the U.S. equity market. Such events occur very frequently, around 400 times a day for actively traded stocks. We find significant price impact associated to this market-maker initiated event, about five times higher than during non-burst periods. Bursts in quotes are concurrent with short-lived structural break in the informational relationship between market makers and market takers. During bursts, market makers no longer passively impound information from order flow into quotes-a departure from traditional market microstructure paradigm. Rather, market makers significantly impact prices during bursts in quotes. Further analysis shows that there is asymmetry in adverse selection between the bid and ask sides of the limit order book and only a sub-population of market makers enjoy an informational advantage during bursts. Our results call attention to the need for a new microstructure perspective in understanding modern high-frequency limit order book markets. |
| Official URL | http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2745342 |
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