LIQUIDITY, PRICE IMPACT AND TRADE INFORMATIVENESS – EVIDENCE FROM THE LONDON STOCK EXCHANGE

Abstract

The rapid development of electronic trading has significantly changed stock exchange markets. Electronic systems providing trading processes have defined a new stock market environment. Such a new environment requires trading process redefinition (generally defined as algorithmic trading), as well as redefinition of well known microstructure hypotheses. This paper conducts standard Hasbrouck’s (1991a, 1991b) market microstructure time series analysis to examine adverse selection and information asymmetry issues on diverse liquidity levelled stocks listed on the London Stock Exchange, which is a market with a significant algorithmic trading share. Based on the results obtained from the considered sample, this paper suggests that the contribution of unexpected trade in the volatility of the efficient price is larger for intensively traded stocks, arguing that Hasbrouck’s (1991a, 1991b) model recognizes algorithmic trading as an unexpected trade, i.e. as a trade caused by superior information.