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This paper examines the order submission strategies and supply of liquidity by highfrequency participants versus the remainder of participants in the limit order book. The results show that high-frequency participants submit orders at multiple prices in the limit order book, concentrated at or within the quote. This activity translates into the provision of liquidity on an on-going basis, which is robust to fast versus slow and volatile markets, together suggesting that high-frequency participants resolve temporal liquidity imbalances in the limit order book. The evidence is consistent with high-frequency trading (HFT) improving market liquidity, but there remain issues surrounding high-frequency participants' effect on market depth and the difficulty of trading of non-HFT participants.

This article extends previous literature which examines the determinants of the price impact of block trades on the Australian Stock Exchange. As previous literature suggests that liquidity exhibits intraday patterns, we introduce time of day dummy variables to explore time dependencies in price impact. Following theoretical developments in previous literature, the explanatory power of the bid-ask spread, a lagged cumulative stock return variable and a refined measure of market returns are also examined. The model estimated explains approximately 29 per cent of the variation in price impact. Block trades executed in the first hour of trading experience the greatest price impact, while market conditions, lagged stock returns and bid-ask spreads are positively related to price impact. The bid-ask spread provides most of the explanatory power. This suggests that liquidity is the main driver of price impact.Large or 'block' transactions play a major role in trading on stock exchanges worldwide. Nearly half of the trades on the NYSE are made in blocks of 10,000 shares or more. Jain (2003) claims that institutional activity, which is predominantly made up of block transactions, accounts for over 70 per cent of all trading activity. The significant quantity of block trades has led to substantial research in the area. Most examines the price impact of block trades, where price impact is measured by comparing the transaction price to an unperturbed price that would have prevailed if the trade were not executed. 1 The causes of price impact are also addressed in the literature. In particular, this has centred on explaining the magnitude and variation in price impact.

During 1999 and 2000, three major futures exchanges transferred trading in stock index futures from open outcry to electronic markets: the London International Financial Futures and Options Exchange (LIFFE); the Sydney Futures Exchange (SFE); and the Hong Kong Futures Exchange (HKFE). These changes provide unique natural experiments to compare relative bid‐ask spreads of open outcry vs. electronically traded markets. This paper provides evidence of a decrease in bid‐ask spreads following the introduction of electronic trading, after controlling for changes in price volatility and trading volume. This provides support for the proposition that electronic trading can facilitate higher levels of liquidity and lower transaction costs relative to floor traded markets. However, bid‐ask spreads are more sensitive to price volatility in electronically traded markets, suggesting that the performance of electronic trading systems deteriorates during periods of information arrival. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:675–696, 2004

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