Ahn And Cheung-The Intraday Patterns Of The Spread And Depth In A Market Without Market Makers (2)

We examine the temporal behavior of the spread and depth for common stocks listed on the Stock Exchange of Hong Kong SEHK., which operates as a purely order-driven mechanism. We find U-shaped intraday and intraweek patterns in the spread and reverseU-shaped patterns in the depth. Our finding is consistent with that of the study of Lee et al 1993. wLee, C.M.C., Mucklow, B., and Ready, M.J., 1993, Spreads, depths, and the impact of earnings information: an intraday analysis, Review of Financial Studies 6, 345–374x of New York Stock Exchange NYSE. stocks that wide spreads are associated with small depths and narrow spreads are associated with large depths. The negative association  between spread and depth on the SEHK implies that limit order traders actively manage both price and quantity dimensions of liquidity by adjusting the spread and depth. Further, larger spreads and narrower depths around the market open and close indicate a trading strategy by limit order traders to avoid possible losses from tradin ith informed traders when the adverse selection problem is severe. The paper provides further evidence that U-shaped spread and reverse U-shaped depth patterns should not be solely attributed to specialist market making activities. q1999 Elsevier Science B.V. All rights reserved 

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