Measuring the price impact from large trades and order flow: an empirical study in market microstructure on Oslo Stock Exchange

Abstract

Theories of market microstructure suggest that large transactions can reveal information and hence impact prices. Extensive research finds support for such a price impact. However, we are not aware of any similar studies at Oslo Stock Exchange (OSE). Other studies have typically been conducted at hybrid markets, e.g. New York Stock Exchange, where there are specialists that facilitate trading. OSE, on the other hand, is a fully electronic limit order market, thus the price dynamics may be different. The implication of a price impact for a trader who plans to submit multiple orders in a stock is that the first trades affect the price of the later trades. We analyze the temporary and permanent impact on security prices from large buy-initiated and sell-initiated transactions. We find that large trades are associated with significant price impacts 5 seconds and 10 minutes after the transactions for most of the stocks in the sample. There are significant intraday differences in the estimated price impacts. Furthermore, we study the aggregated difference between buy-initiated and sell-initiated turnover, i.e. order flow. We analyze a model where returns over 15 minute intervals are explained by the past order flows. Normalized order flow has a significant effect on returns, but it explains little of the variance.