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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Trader Positions and Marketwide Liquidity Demand
Esen Onur
John S. Roberts
Tugkan Tuzun
Abstract

In electronic, liquid markets, traders frequently change their positions. The distribution of these trader position changes carries important information about liquidity demand in the market. From this distribution of trader position-changes, we construct a marketwide measure for intraday liquidity demand that does not necessarily depend on aggressive trading. Using a rich regulatory dataset on S&P 500 E-mini futures and 10-year Treasury futures markets, we show that this liquidity demand measure has a positive impact on prices. We then decompose our measure of liquidity demand into three components: aggressive, passive and mixed liquidity demand. Passive liquidity demand also has an impact on prices; a one standard deviation increase in passive liquidity demand is associated with 0.5 tick rise in prices for S&P 500 E-mini futures. In addition, we find that new information is incorporated into the prices when passive liquidity demanders take positions. By providing direct evidence, we contribute to the growing literature on the impact of passive limit orders.


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Esen Onur & John S. Roberts & Tugkan Tuzun, Trader Positions and Marketwide Liquidity Demand, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-103, 05 Oct 2017.
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Subject headings:
Keywords: Liquidity ; Passive Trading ; Price Impact
DOI: 10.17016/FEDS.2017.103
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