The Impact of Order Size on Stock Liquidity - A Representative Study -

Liquidity, the ease of trading an asset, strongly varies between different sizes of stockpositions. We analyze this aspect using the Xetra Liquidity Measure (XLM), whichcalculates daily, weighted spread for impatient traders transacting against the limitorder book. For this measure, we have data for 160 German stocks over 5.5 years,which allows us a representative analysis of the order-size impact on liquidity costand its main statistical characteristics.We nd that in the sample period average liquidity costs rose to over 100bp inlarge DAX and to 460bp in large SDAX positions. Over the last 5.5 years, liquidityhas equally improved across all order sizes. Liquid position sizes, however, sufferedless badly during the recent sub-prime crises, which represents another type of theight-to-liquidity.As the basis for further theoretical analysis, we nd that trends in liquidity levelsand ineciencies in liquidity prices of large positions generate non-normality in theliquidity distribution. We also show that - as a rule of thumb - liquidity of an ordersize relative to market value and transaction volume is constant across stocks andtime. While order size is not the most important liquidity determinant, doublingorder size increases liquidity cost by 5-10% on average when accounting for otherdifferences in stocks.[...]