Order imbalance and liquidity supply: Evidence from the bubble burst of Nasdaq stocks

Mingsheng Li, Timothy McCormick, Xin Zhao

Research output: Contribution to journalArticle

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Abstract

In this study we analyze the effect of order imbalance on the quotation behavior of Nasdaq market makers. We find that Nasdaq market makers use both price and quantity quotes when dealing with order imbalances. However, order imbalance affects only price movement, not spreads. We also find that Nasdaq market makers quote more shares and compete more intensively on bid-side (ask-side) when public sells (buys) exceed public buys (sells). These suggest that market makers increase liquidity supply when order imbalances exist. More interestingly, we show that both market conditions and price movements affect investors' trading behavior.

Original languageEnglish (US)
Pages (from-to)533-555
Number of pages23
JournalJournal of Empirical Finance
Volume12
Issue number4
DOIs
StatePublished - Sep 1 2005

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All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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