Informed Traders as Liquidity Providers: Evidence from the German Equity Market [Paperback]

Alexandra Hachmeisters thesis empirically analyzes and positively answers the question whether informed traders provide liquidity in an open limit order book. The analyses include a detailed market description of the German equity market, a new methodological approach for the identification of informed traders as well as the analysis of the individual liquidity providing and demanding behavior of the identified informed traders.Today, the majority of large international stock exchanges operates electronic trading systems and abandons more and more floor trading which relies upon specialists and market makers. The preferred trading mechanism is the so-called open limit order book, which induces continuous double auction trading without any market participants designated to facilitate trading through their own trading activity. Trading in these market structures is considered the more attractive the smaller the spread between the highest buy and the lowest sell limit order, i.e. the more liquid a market is. This leads to the question which market participants are willing to enter buy and sell limit orders in the open limit order book to enable liquid trading. Traditional theoretical literature concludes that exclusively uninformed traders enter limit orders and provide liquidity while impatient informed traders enter liquidity-consuming market orders. Recent, primarily experimental studies question this rigid distinction. This is the starting point for Ms Hachmeisters thesis, when she analyzes  based upon an individually compiled extensive set of transaction data  informed traders order type choice.Liquidity (definition and measurement)Informed trading (definition and identification of informed traders)Open limit order bookEmpirical analysis (high frequency transaction data)Liquidity provision by informed tradersDr. Alexandra Hachmeister promovierte bei Prof. Dr. Dirk Schiereck am Stiftungslehrstuhl Bank- und Finanzmanagement der European Business School, Oestricl.