This study sheds light on the resiliency of competing electronic order-driven markets by investigating the time path of liquidity after a large endogenous shock by means of an intra-day event study. We confirm earlier results that large trades, which qualify as shocks for the purpose of this analysis, are timed as they occur when liquidity in the market is extraordinarily high. Moreover, we find that adverse liquidity effects peak within the first-minute interval after a large trade. In contrast to previous researchers’ results, we discover that liquidity recovers not within minutes, but within a few seconds so that the adverse effect already diminishes significantly towards the end of the first post-event minute. Three minutes later, basically no residue from the liquidity shock remains observable. We attribute this finding to the fact that temporary order-book imbalances are immediately detected by algorithmic trading engines and high-frequency traders whose order management (IT-) systems are continuously eagleeying the stock markets for such opportunities. Interestingly, our results differ depending on the market under scrutiny.
Chlistalla, Michael, "FROM MINUTES TO SECONDS AND BEYOND: MEASURING
ORDER-BOOK RESILIENCY IN FRAGMENTED ELECTRONIC
SECURITIES MARKETS" (2011). ECIS 2011 Proceedings. 94.