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High frequency trading and ghost liquidity

Hans Degryse, Rudy De Winne, Carole Gresse and Richard Payne
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Hans Degryse: K.U. LEUVEN - KU Leuven - Catholic University of Leuven - Katholieke Universiteit Leuven
Rudy De Winne: Louvain School of Management - UCL - Université Catholique de Louvain
Carole Gresse: DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique
Richard Payne: Cass Business School - City University London - City University London

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Abstract: We measure the extent to which consolidated liquidity in modern fragmented equity markets overstates true liquidity due to a phenomenon that we call Ghost Liquidity (GL). GL exists when traders place duplicate limit orders on competing venues, intending for only one of the orders to execute, and when one does execute, duplicates are cancelled. We employ data from 2013, covering 91 stocks trading on their primary exchanges and three alternative platforms and where order submitters are identified consistently across venues, to measure the incidence of GL and to investigate its determinants. On average, for every 100 shares pending on an order book, slightlymore than 8 shares are immediately cancelled by the same liquidity supplier on a different venue.This percentage is significantly greater for HFTs than for non-HFTs and for those trading as principal. Overall, GL represents a significant fraction of total liquidity, implying that simply measured consolidated liquidity greatly exceeds true consolidated liquidity.

Keywords: Ghost Liquidity; High Frequency Trading (HFT); Algorithmic Trading (AT); Fragmentation (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
Date: 2018-05
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Published in 35th Annual Conference of the French Finance Association (AFFI), May 2018, Paris, France. 2018

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