Stock Characteristics and the Information Content of the Limit Order Book

This study investigates the contribution of the limit order book to the price discovery process of blue-chip stocks traded on Borsa Istanbul. Using various price series, including the last trade price, best prices of the order book, and price steps beyond the best price levels, we measure the contribution of orders beyond best prices to price discovery, as measured through their information shares, and how this changes across different stock characteristics such as return, size, volume, and illiquidity. Our findings indicate that the order book is a vital factor in price discovery, and traders should pay close attention to the depth of the order book to gain a more accurate understanding of the market. Furthermore, we reveal that the information share of the limit order book varies significantly with different stock characteristics. Specifically, the contribution of the last trade price to price discovery increases with extreme returns, size, and illiquidity, while the contribution of the depths of the order book diminishes. The differences can be attributed to the shifting tug-of-war between informed and uninformed traders. This study contributes valuable insights into the workings of financial markets, benefiting market participants and policymakers alike