Sunshine Trading: Flashes of Trading Intent at the NASDAQ

Johannes Skjeltorp, Elvira Sojli and Wing Wah Tham
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Wing Wah Tham: Erasmus University Rotterdam

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Forthcoming in the 'Journal of Financial and Quantitative Analysis'.

We use the introduction and the subsequent removal of the flash order facility (an actionable indication of interest, IOI) from the NASDAQ as a natural experiment to investigatethe impact of voluntary disclosure of trading intent on market quality. We find that flashorders significantly improve liquidity in the NASDAQ. In addition, overall market qualityimproves substantially when the flash functionality is introduced and deteriorates when it isremoved. One explanation for our findings is that flash orders are placed by less informedtraders and fulfill their role as an advertisement of uninformed liquidity needs. They successfully attract responses from liquidity providers immediately after the announcement isplaced, thus lowering the risk-bearing cost for the overall market. Our study is important inunderstanding the impact of voluntary disclosure, in guiding future market design choices,and in the current debate on dark pools and IOIs.

Keywords: Actionable Indication of Interest (IOI); Flash orders; High-frequency Trading (search for similar items in EconPapers)
JEL-codes: G10 G14 G20 (search for similar items in EconPapers)
Date: 2012-12-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Sunshine trading: Flashes of trading intent at the NASDAQ (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20120141

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