Behaviors of liquidity patterns in a limit order-driven market, an evidence from Chinese stock markets

This Paper examines the intraday behaviors of bid/ask spreads, depths and their determinants on an order-driven market in the Shanghai Stock Exchange. Our analysis shows that the intraday 5-minute bid/ask spreads display an L-shaped pattern and the depths exhibit an inverted L-shaped pattern. With respect to the determinants for the bid/ask spread and depth, first, we attributed the widening of spreads (lowest depth) at the open of the call auction, and continuous trading to the factor of asymmetric information, which plays an important role in the patterns for liquidity. Our findings are consistent with those from the NASDAQ and CBOE (Chan et al. (1995a,b)). Secondly, intraday spreads at the close of trading show a small increase in the last several intervals (and decrease in depths) are consistent with the inventory management hypothesis since traders on the Shanghai market are expected to manage their inventories in a manner similar to that of multiple dealers. Thirdly, the simultaneous occurrence of relatively wider spreads and lower depths on Mondays is consistent with the predictions of Foster and Viswanathan (1990). Higher Monday opening spreads are probably due to the information accumulation during non-trading hours. Fourthly, we also found that the striking L-shaped pattern of the bid/ask spreads has a positive relation with the volatility and a negative relation with stock prices, while the striking reversed L-shaped pattern of the depths has a negative relation with stock prices and the volatility but a positive relation with trading volumes. Finally, there is a negative relation between the spreads and the depths at the opening of the trading day. Overall, our results suggested that the determinants of information asymmetries, through time and across traders, play a key role in generating observed liquidity variations.