Essays on Market Microstructure

: Evidence on the UK Market

Abstract

Employing stocks traded on the London Stock Exchange (LSE), this thesis studies market microstructure in the high-frequency trading period.

Chapter 2 studies the system upgrading event implemented in 2011. By examining changes in liquidity and liquidity dynamics, it finds that spread deteriorates (improves) for FTSE 100 (FTSE 250) stocks. This is due to changes in the competition of liquidity provision. Although the static depth measure does not show differences, it recovers faster after a liquidity shock after the event. Moreover, LSE's average information share declines at a higher frequency, implying further speeding up the exchange system may not be good for price discovery.

Chapter 3 investigates the Minimum Quantity at Touch rule imposed on liquidity suppliers for most stocks traded on the LSE AIM market in 2015. It finds that liquidity improves (deteriorates) in the quantity (price) dimension. The overall effect is not altered. Price becomes more (less) efficient for stocks that exhibited reversal (momentum) before the event. Neither the average price efficiency nor price impact changes but order placements in the 21st century differ from those of the 1990s.

Chapter 4 advocates the slope of the limit order book to be a measure of illiquidity. It finds that the summation of the bid- and ask-side slopes is negatively related to contemporaneous return, implying that this measure reflects trading costs. It is also positively associated with volatility, suggesting volatility is primarily driven by informed trading. Additionally, the relationships between the bid- and ask-side slopes and returns indicate that liquidity suppliers learn information better than they do for larger stocks, and liquidity demanders of smaller stocks are more informed than liquidity suppliers. Values of the probability of informed trading for a few smaller stocks are below 50%, which is due to the low probability of information events occurring instead of the low arrival rate of informed traders.

Date of Award	22 Mar 2022
Original language	English
Awarding Institution	University of Bristol
Supervisor	Nick J Taylor (Supervisor) & Balint L Horvath (Supervisor)