Liquidity Supply and Demand: Empirical Evidence from the Vancouver Stock Exchange

Burton Hollifield (), Robert Miller, Patrik Sandas () and Joshua Slive

No 1999-E19, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: We analyze the costs and benefits of providing and using liquidity in a limit order market. Using a large and comprehensive data set which details the complete histories of orders and trades on the Vancouver Stock Exchange, we are able to model the order flow and measure market liquidity as it changes over time. We accomplish this by constructing a measure of the expected net payoffs to demanding or supplying liquidity, and using our data on order arrivals and placement decisions to make inferences about the traders' demand for liquidity and the cost of entering orders in the market. Our results show that liquidity demand is indeed time varying, and is related to several key observable measures of market characteristics. Furthermore, we find evidence of unexploited profit opportunities in the market, perhaps implying that traders do not continuously monitor the market for profitable trades.

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