Order Flow and Liquidity around NYSE Trading Halts

Abstract

We study order f low and liquidity around NYSE trading halts. We find that market and limit order submissions and cancellations increase significantly during trading halts, that a large proportion of the limit order book at the reopen is composed of orders submitted during the halt, and that the market-clearing price at the reopen is a good predictor of future prices. Depth near the quotes is unusually low around trading halts, though specialists and0or f loor traders appear to provide additional liquidity at these times. Finally, specialists appear to "spread the quote" prior to imbalance halts to convey information to market participants. THE COSTS AND BENEF ITS ASSOCIATED with New York Stock Exchange trading halts are the subject of continuous debate. The stated purpose of trading halts is to allow investors a chance to react to new information and to facilitate the orderly emergence of a new equilibrium price~see, e.g., NYSE~1999!!. However, little is known about the extent or nature of investor reactions to trading halts. Furthermore, it is unclear whether these reactions support or confound attempts to reach a new equilibrium price. To address these issues, we use nonpublic NYSE data on all SuperDOT~electronic! orders to analyze the effects of trading halts on order f low, spreads, and the limit order book. We also examine the relationships between the limit order book and the reopening price and between liquidity and post-halt volatility.Information on order f low is an important missing element in the ongoing debate about the usefulness of trading halts. One argument against trading halts is that they impede price formation because trading aggregates information that is distributed across market participants. However, submissions and cancellations of orders during a halt may provide an alternative source of information that, combined with published indications of possible reopening prices, may assist with price formation. An argument in favor of trading halts is that when traders are given an opportunity to cancel orders 1771 during extreme market changes, they may be more willing to supply liquidity during normal conditions. Our analysis allows us to examine whether traders take advantage of this opportunity to reposition their trading interest.Whereas analysis of order f low provides insight into the actions of traders during halts, the net effect of this activity on liquidity is ref lected in spreads and the limit order book. The limit order book competes with specialists and the trading f loor for order f low and provides a pool of trading interest that can dampen temporary price f luctuations. Thus, changes in the limit order book may impact spreads and volatility. We characterize the limit order book and bid-ask spreads before, during, and after trading halts to provide new evidence about changes in liquidity around halts and the impact of the limit order book on volatility and price discovery around halts. 1 We find that limit order submissions and cancellations are extremely high during halts an...

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