
doi: 10.2139/ssrn.1342228
We analyze the role of liquidity provision of limit order traders in the NYSE. Using an extensive limit order book data for all the ordinary stocks in the NYSE, we compute various measures of liquidity and imbalance in liquidity. We show that the interest rate environment has a strong impact on the willingness of limit order traders to provide liquidity. Higher cost of financing the provision of liquidity reduces the liquidity in the limit order book. Limit order traders are also more willing to provide liquidity earlier in the week than later. Imbalance between buy side and sell side liquidity exhibit high autocorrelation. Higher buy side liquidity increases daily market returns in the same period. Both contemporaneous and lag daily market returns have a positive impact on the imbalance of the liquidity in the limit order book. However, we find that on an intraday basis, higher sell side liquidity in the pervious period increases returns in the current period, and higher intraday contemporaneous returns increase sell side liquidity more than buy side liquidity. This may be indicative of the market stabilizing role that limit order traders play.
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