Liquidity dynamics in an electronic open limit order book: An event study approach

We analyze the dynamics of liquidity in Xetra, an electronic open limit order book. We use the Exchange Liquidity Measure (XLM), a measure of the cost of a roundtrip trade of given size V. This measure captures the price and the quantity dimension of liquidity. We present descriptive statistics, analyze the cross-sectional determinants of the XLM measure and document its intraday pattern. Our main contribution is an analysis of the dynamics of the XLM measure around liquidity shocks. We use intraday event study methodology to analyze how a shock affects the XLM measure. We consider two sets of liquidity shocks, large transactions (which are endogenous events because they originate in the market) and Bloomberg ticker news items (which are exogenous events because they originate outside of the market). We find that resiliency after large transactions is high, i.e., liquidity quickly reverts to normal levels. We further document that large trades take place at times when liquidity is unusually high. We interpret this as evidence that large transactions are timed. The Bloomberg ticker news items do not have a discernible effect on liquidity.