Trader Positions and Marketwide Liquidity Demand

Esen Onur, John S. Roberts and Tugkan Tuzun
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Tugkan Tuzun: https://www.federalreserve.gov/econres/tugkan-tuzun.htm

No 2017-103, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: In electronic, liquid markets, traders frequently change their positions. The distribution of these trader position changes carries important information about liquidity demand in the market. From this distribution of trader position-changes, we construct a marketwide measure for intraday liquidity demand that does not necessarily depend on aggressive trading. Using a rich regulatory dataset on S&P 500 E-mini futures and 10-year Treasury futures markets, we show that this liquidity demand measure has a positive impact on prices. We then decompose our measure of liquidity demand into three components: aggressive, passive and mixed liquidity demand. Passive liquidity demand also has an impact on prices; a one standard deviation increase in passive liquidity demand is associated with 0.5 tick rise in prices for S&P 500 E-mini futures. In addition, we find that new information is incorporated into the prices when passive liquidity demanders take positions. By providing direct evidence, we contribute to the growing literature on the impact of passive limit orders.

Keywords: Liquidity; Passive Trading; Price Impact (search for similar items in EconPapers)
JEL-codes: G10 G13 G14 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2017-10-05
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-103

DOI: 10.17016/FEDS.2017.103

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