Liquidity Dynamics in the Xetra Order Book.

In this paper we show how to reconstruct the limit order book of the 30 stocks constituting the DAX30 index based on the trading protocol of the Xetra Trading System at the Frankfurt Stock Exchange. The algorithm used is innovative as it captures all trading phases, including auctions, and delivers a reconstruction of the orderbook either from a trader’s view or a supervisory view including hidden volume as well. Based on the rebuilt order book, liquidity dynamics are examined. In contrats to findings for dealer markets, past market returns play a minor role in the determination of liquidity and liquidity commonality in Xetra, a pure limit order book market. Consequently, we provide evidence that liquidity provision by multiple sources in Xetra mitigates systemic liquidity risk introduced by the interrelation of return and liquidity. [ABSTRACT FROM AUTHOR]