TY - JOUR
T1 - The intraday patterns of the spread and depth in a market without market makers
T2 - The Stock Exchange of Hong Kong
AU - Ahn, Hee Joon
AU - Cheung, Stephen Y L
N1 - Funding Information:
We would like to thank an anonymous referee, as well as Kee-Hong Bae, Kalok Chan, and Violet Torbey for their helpful suggestions and comments. We also thank Karen Lam of the Stock Exchange of Hong Kong for her description of the exchange trading system. Hee-Joon Ahn acknowledges financial support from the City University of Hong Kong's strategic grant No. 7000892. Any remaining errors are our own.
PY - 1999/12
Y1 - 1999/12
N2 - We examine the temporal behavior of the spread and depth for common stocks listed on the Stock Exchange of Hong Kong (SEHK), which operates as a purely order-driven mechanism. We find U-shaped intraday and intraweek patterns in the spread and reverse U-shaped patterns in the depth. Our finding is consistent with that of the study of Lee et al. (1993) [Lee, C.M.C., Mucklow, B., and Ready, M.J., 1993, Spreads, depths, and the impact of earnings information: an intraday analysis, Review of Financial Studies 6, 345-374] of New York Stock Exchange (NYSE) stocks that wide spreads are associated with small depths and narrow spreads are associated with large depths. The negative association between spread and depth on the SEHK implies that limit order traders actively manage both price and quantity dimensions of liquidity by adjusting the spread and depth. Further, larger spreads and narrower depths around the market open and close indicate a trading strategy by limit order traders to avoid possible losses from trading with informed traders when the adverse selection problem is severe. The paper provides further evidence that U-shaped spread and reverse U-shaped depth patterns should not be solely attributed to specialist market making activities.
AB - We examine the temporal behavior of the spread and depth for common stocks listed on the Stock Exchange of Hong Kong (SEHK), which operates as a purely order-driven mechanism. We find U-shaped intraday and intraweek patterns in the spread and reverse U-shaped patterns in the depth. Our finding is consistent with that of the study of Lee et al. (1993) [Lee, C.M.C., Mucklow, B., and Ready, M.J., 1993, Spreads, depths, and the impact of earnings information: an intraday analysis, Review of Financial Studies 6, 345-374] of New York Stock Exchange (NYSE) stocks that wide spreads are associated with small depths and narrow spreads are associated with large depths. The negative association between spread and depth on the SEHK implies that limit order traders actively manage both price and quantity dimensions of liquidity by adjusting the spread and depth. Further, larger spreads and narrower depths around the market open and close indicate a trading strategy by limit order traders to avoid possible losses from trading with informed traders when the adverse selection problem is severe. The paper provides further evidence that U-shaped spread and reverse U-shaped depth patterns should not be solely attributed to specialist market making activities.
KW - Depth
KW - G10
KW - G15
KW - Intraday patterns
KW - Limit orders
KW - Spread
KW - The Stock Exchange of Hong Kong
UR - http://www.scopus.com/inward/record.url?scp=0011025144&partnerID=8YFLogxK
U2 - 10.1016/S0927-538X(99)00023-2
DO - 10.1016/S0927-538X(99)00023-2
M3 - Journal article
AN - SCOPUS:0011025144
SN - 0927-538X
VL - 7
SP - 539
EP - 556
JO - Pacific Basin Finance Journal
JF - Pacific Basin Finance Journal
IS - 5
ER -