RT Monograph
SR 00
A1 Biais, Bruno
A1 Declerck, Fany
A1 Moinas, Sophie
T1 Who supplies liquidity, how and when?
YR 2017
FD 2017-06
VO 17-818
SP 38
K1 Liquidity
K1 high-frequency trading
K1 proprietary trading
K1 adverse selection
K1 electronic limit order book
K1 short-term momentum
K1 contrarian
AB Who provides liquidity in modern, electronic limit order book, markets? While agency trading can be constrained by conflicts of interest and information asymmetry between customers and traders, prop traders are likely to be less constrained and thus better positioned to carry inventory risk. Moreover, while slow traders'limit orders may be exposed to severe adverse selection, fast trading technology can improve traders'ability to monitor the market and avoid being picked off. To shed light on these points, we rely on unique data from Euronext and the AMF enabling us to observe the connectivity of traders to the market, and whether they are proprietary traders. We find that proprietary traders, be they fast or slow, provide liquidity with contrarian marketable orders, thus helping the market absorb shocks, even during crisis, and earn profits doing so. Moreover, fast traders provide liquidity by leaving limit orders in the book. Yet, only prop traders can do so without making losses. This suggests that technology is not enough to overcome adverse selection, monitoring incentives are also needed.
T2 TSE Working Paper
PB TSE Working Paper
PP Toulouse
AV Published
LK https://publications.ut-capitole.fr/id/eprint/24141/
UL http://tse-fr.eu/pub/31768