Investor Type and Commonality in Liquidity

This study examines whether investor type matters in the way institutional investors induce commonality in liquidity. We find that domestic and foreign institutional investors affect commonality in liquidity differently. Commonality in depth decreases as the volume of foreign initiated trades increase. We also find that domestic (foreign) investors take away commonality in depth (spread) when they engage in two (one) sided trade. While our results fail to confirm the asymmetric impact of flow induced trades on commonality in liquidity, we confirm the positive relationship between correlated trading and commonality in liquidity. Also, by examining a sub period around the global financial crisis, we note negotiated trades play a significant role in the absence of commonality in liquidity. Namely, negotiated sells that dominated the negotiated market during the crisis period could be the reason why commonality in liquidity was absent in the regular market.