LIQUIDITY OF THE NYSE LIMIT ORDER BOOK

Abstract

We examine the time-series properties of the NYSE limit order book liquidity at an aggregate market level and at a cross-sectional level. We attempt to find any relations between the limit order book liquidity and a set of explanatory variables similar to that employed by Chordia, Roll and Subrahmanyam (2001). With a comprehensive set of data which spans from January 2003 to December 2003, we also provide a detailed description of the limit order book on both an intraday and a cross-sectional basis. We find that the liquidity of the limit order book improves throughout the trading day, especially during the last trading hour. We also find that large stocks have deeper and more liquid limit order books. The time-series analysis shows that recent down markets has an adverse impact on the limit order book liquidity and small stocks are more susceptible to the influence of the recent market conditions. We also observe day-of-the-week effects where Fridays are associated with lower liquidity and Mondays with higher liquidity. Large stocks are affected the most by this day-of-the-week effect. Order book liquidity increases on trading days adjacent to the federal holidays observed by the Exchange. Of the debt instrument variables employed in this study, only short term interest rate changes have significant influence on the order book liquidity. Specifically, upward fluctuations in the Federal Funds rate are associated with wider dispersed limit order books and higher costs-to-trade. The short term interest rate variable is found to have exceptionally strong impacts on the limit order book liquidity of large stocks.