This report follows an earlier ESMA report on the size of HFT activity in European equity markets whose findings and datasets were reused for this report. ESMA considered a sample of 100 stocks across 12 European trading venues in nine EU countries for May 2013.
ESMA found that order duplication and immediate cancellation is used by traders to ensure execution across multiple trading venues. This strategy is commonly used for market makers’ activities and by institutional investors seeking liquidity and it contributes positively to liquidity. However, for measuring liquidity the ESMA report found that duplicated orders and immediate cancellation lead to the overestimation of available liquidity in fragmented markets. This means that a certain percentage of the liquidity visible in order books is ultimately not available to the markets.
The duplication of orders varies between the types of trades, the market capitalisation of the underlying stock and the trading fragmentation in a stock. In addition, order duplication is more recurrent for HFT.
In general, the ESMA report shows that multi-venue trading increases liquidity in equity markets. ESMA proposes, on the basis of its findings on the overestimation of liquidity due to the duplicated orders and subsequent cancellations, to take duplicated orders into account when measuring liquidity.
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