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Flashes of Trading Intent at NASDAQ

Published online by Cambridge University Press:  23 March 2016

Johannes A. Skjeltorp ,
Elvira Sojli  and
Wing Wah Tham
Johannes A. Skjeltorp
Affiliation:
jsk@nbim.no, Norges Bank Investment Management, Oslo 0107, Norway
Elvira Sojli*
Affiliation:
esojli@rsm.nl, Erasmus University, Rotterdam School of Management, Rotterdam 3000DR, The Netherlands
Wing Wah Tham
Affiliation:
tham@ese.eur.nl, Erasmus University, Erasmus School of Economics, Rotterdam 3000DR, The Netherlands and University of New South Wales.
*
*Corresponding author: esojli@rsm.nl
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Abstract

We use the introduction and subsequent removal of the flash-order functionality from NASDAQ as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We find that flash orders significantly improve liquidity in NASDAQ. Furthermore, overall market quality improves (deteriorates) when flash functionality is introduced (removed). This result can be attributed to increased competition among liquidity suppliers across competing trading venues. Alternatively, flash orders attract responses from reactive traders immediately after the announcement, attracting more “hidden liquidity” and lowering risk-bearing costs for the overall market.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 1 , February 2016 , pp. 165 - 196
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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