An Empirical analysis of liquidity in an open electronic limit order book market

Abstract

A liquid market is a place where many buyers and sellers are present at any time. If any newlineasset can be traded immediately with little impact on the market price irrespective of trade newlinesize, the asset is said to be liquid. Liquidity is associated with three dimensions of trading newline- price, volume and time. Liquid markets enhance the welfare of the whole economy. These newlinemarkets are avenues for exchange of assets for useful utilisation and risk sharing. Market newlinestability and efficiency are better for liquid markets. This thesis discusses in detail about newlinethe liquidity of a stock in National Stock Exchange of India (NSE). newlineNSE follows an open electronic limit order book (OELOB) trading system. Outstanding newlineand unmatched limit orders are stored in the limit order book. Limit order book is characterised newlineby dispersion in limit price, depth and limit order age. The distance between two newlineprice levels of limit order can be measured by relative price spread. We observe that mean newlinerelative bid-ask spread is 1.40% at NSE. The relative bid-ask spread is widest among all newlinethe relative price spreads. The total number of limit orders at ask side is more than the bid newlineside of limit order book. The order book length in ticks of bid side is smaller than the ask newlineside. Total depth at ask side is larger than bid side. This implies that the ask side and bid newlineside are not symmetrical in behaviour. newlineAccurate liquidation cost estimates are critical to the equity investment process. The newlineadvantages achieved through superior selection of stocks can be wiped out on ignoring the newlineliquidation costs. After the availability of complete limit order book, impact cost can be newlinecomputed for a particular trade size. Impact cost acts as a proxy for liquidity. It captures newlinethe trade size information as well as price information. It is better than the highly popular newlineproxy, bid-ask spread as it provides information beyond the inside quotes. We document newlinethe empirical characteristics of impact cost of forty nine stocks for each side of book and for newlinetrade sizes - Rs 0.01