1 Limit Order Book and Commonality in Liquidity

Obtaining a unique limit order dataset provided by NYSE, we find there exits significant commonality in the liquidity provided by the NYSE limit order book. We also examine how the commonality documented above can explain the commonality in bid-ask spread, and how this commonality in limit order book is related with the liquidity commonality contributed by specialist firm. We find that the cost-to-trade and the dispersion of individual stock’s limit order book co-move with the corresponding aggregate market limit order book measures. On the limit order book, there is an asymmetric relationship between individual liquidity and market liquidity on bid- and ask-side: individual stock liquidity co-moves more with the market liquidity on the same side rather than the opposite side. Furthermore, the commonality in limit order book is significantly related to commonality in bid-ask spread