Trade Intensity and Liquidity

This analysis investigates how liquidity is affected by periods of high trade intensity. Using an orderbook constructed directly from CME FIX/FAST messages and timestamped to the millisecond, we test whether the number of changes in the orderbook, the size of the bid–ask spread, and the number of trades in the few seconds before a trade have an effect on the book’s liquidity in the milliseconds after the trade. Since we calculate liquidity over a period of 100[Formula: see text]ms after a trade, we focus on liquidity provided by high-frequency traders (HFTs). We find evidence consistent with larger bid–ask spreads leading to greater amounts of liquidity being provided by HFT post-trade, and HFT providing liquidity when there is more activity in the orderbook. We further find that more trades lead to reduced liquidity, consistent with trades incorporating private information, and market makers’ fear of being adversely selected when providing liquidity.