The Impact Of Cancellation Activity On Market Liquidity

The order-driven mechanism is adopted in China's stock market.After orders are submitted by investors,they will be matched according to the principle of 'Price and Time Preference' by the Stock Exchange.The limit orders that fail to be traded will be accumulated to form the limit order book.Most researchers believe that the limit order book is one of the sources of market liquidity.The cancellation activity refers to the withdrawal of the limit order submitted by the investors for various reasons after submitting the limit order.The cancellation activity has an impact on market liquidity by affecting the probability of non-transaction.The existing studies mainly focus on the issues related to the market liquidity driven by quotation.However,limited studies focus on the impacts of cancellation activity on market liquidity under the order-driven mechanism.The aim of the study is to analyze the impact of the cancellation activity on market liquidity.Withdrawal orders submitted by all investors as well as by subgroups of buyer's investors and seller's investors would be considered in the study respectively.The high-frequency data of Shanghai Stock Exchange and Shenzhen Stock Exchange from 2010 to 2016 is used in the study.2.3 million valid data are adopted after eliminating the missing data.In addition,Overall Relative Price Spread Index,Relative Effective Spread Index in Buyer's Market and Relative Effective Indicators to Seller's Market are used to measure Market Liquidity,Buyer's Market Liquidity and Seller's Market Liquidity respectively.The 2SLS regression model of panel data is applied to analyze the impact of cancellation activity on market liquidity.The main conclusions of the thesis are as follows:As the proportion of withdrawals in the A-share market increases,the market liquidity improves.The increase of the withdrawal ratio of seller(buyer)improves the buyer's(seller's)market liquidity.The bigger the volume is,the higher the degree of improvement of the market liquidity caused by the cancellation activity.The market liquidity can be seriously damaged through the market manipulation by cancellation activity.