Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/225288 
Year of Publication: 
2020
Series/Report no.: 
SAFE Working Paper No. 291
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
Market fragmentation and technological advances increasing the speed of trading altered the functioning and stability of global equity limit order markets. Taking market resiliency as an indicator of market quality, we investigate how resilient are trading venues in a high-frequency environment with cross-venue fragmented order flow. Employing a Hawkes process methodology on high-frequency data for FTSE 100 stocks on LSE, a traditional exchange, and on Chi-X, an alternative venue, we find that when liquidity becomes scarce Chi-X is a less resilient venue than LSE with variations existing across stocks and time. In comparison with LSE, Chi-X has more, longer, and severer liquidity shocks. Whereas the vast majority of liquidity droughts on both venues disappear within less than one minute, the recovery is not lasting, as liquidity shocks spiral over the time dimension. Over half of the shocks on both venues are caused by spiralling. Liquidity shocks tend to spiral more on Chi-X than on LSE for large stocks suggesting that the liquidity supply on Chi-X is thinner than on LSE. Finally, a significant amount of liquidity shocks spill over cross-venue providing supporting evidence for the competition for order flow between LSE and Chi-X.
Subjects: 
liquidity
resiliency
fragmentation
competition
high-frequency data
Hawkes processes
JEL: 
G10
G14
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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