Order Imbalance and Its Impact on Market Performance: Order‐driven vs. Quote‐driven Markets

Yu Chuan Huang and Jian‐Hsin Chou

Journal of Business Finance & Accounting, 2007, vol. 34, issue 9‐10, 1596-1614

Abstract: Abstract: The behavior of order imbalance and its impact on market performance at the two Taiwan stock index futures markets, the TAIFEX and the SGX‐DT, is investigated. The TAIFEX is an order‐driven call market, while the SGX‐DT uses a quote‐driven continuous trading system. Our empirical results show that for the TAIFEX order‐driven market, the spread is minimized when order imbalance is high. In contrast, for the SGX‐DT quote‐driven market, the spread is highest when order imbalance is high. For both markets, order imbalance has an impact on market liquidity and volatility. The impact is larger and more significant for SGX‐DT futures. This suggests that the order‐driven market mechanism of TAIFEX futures is superior in absorbing order imbalance and in reducing the resulting price impact.

Date: 2007
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