Abstract

Using data sets on orders, order packages, quotes, trades and market-limit orders, we investigate several aspects of the microstructure of the Saudi Stock Market (SSM) under the computerized trading system, ESIS (Electronic Securities Information System). We study the interaction between the order book and order flow, limit order execution, trading by limit versus market orders, order performance, and the information content of newly submitted orders. Our findings provide new evidence for several issues, and have important implications for the design of the trading mechanism on the SSM. Although the SSM has a distinct structure, the intraday patterns in its order book and flow are surprisingly similar to those found in other markets with different structures. The average relative inside spread is large compared to other markets, mainly due to a relatively high tick size. Tick size is an important determinant of the inside spreads for low priced stocks. While immediacy is available nearly all the time, market liquidity, as commonly measured by width and depth, is relatively low on the SSM. Limit orders that are priced reasonably, on average, have a short duration before being executed, and have a high probability of subsequent execution. The analysis of market versus limit order trading on the SSM significantly supports the spread effect predicted by order driven market models. The probability of placing a market order increases as the spread decreases. When the order imbalance increases in favor of the other side of the market, traders are more likely to submit market orders. The performance of orders predicts limit orders placed at the quote, or when the spread is wide, perform best, and that limit orders are subject to a winner's curse. The assessment of the information content of orders implies the presence of a very large quantity of asymmetric information on the SSM. As predicted by the asymmetric information models, we find that larger and more aggressive orders are more informative. Like many previous empirical studies, information-based trading is higher for less active stocks. Generally, our findings indicate that liquidity on the SSM, which is sustained by limit order trading, is at risk because of a high level of information trading. Thus, we propose several measures that are expected to increase the level of participation by limit order traders in this market