This study identifies early warning signals of short-term illiquidity in high-speed equity markets by analyzing message traffic, particularly from high-frequency traders (HFTs). Using detailed data from India's NSE, it introduces a net order flow (NOF) metric that includes passive and aggressive orders, cancellations, and revisions. The key finding is that only unexpected changes in HFTs’ net buying pressure - especially from passive order flow - predict rising liquidity costs and price impacts. These signals are strengthened by market-wide HFT behavior. Importantly, HFTs’ rapid order updates reflect risk management rather than manipulation, offering regulators a tool to anticipate and mitigate liquidity shortfalls.
Co-author (s):David Abad, Magdalena Massot, Roberto Pascual, Jos´e Yagüe
Journal: Emerging Markets Review
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