Interday Price Formation on the London Stock Exchange

Using transactions data from the London Stock Exchange, the paper estimates the extent to which market maker's prices are influenced by trades (order flow). Also, by looking at the duration of these order flow effects, the paper attempts to establish whether these effects are due to information contained in orders or just transitory liquidity effects. The results show that trades do indeed contain information, though information is concentrated in larger trades. The paper also assesses the effect of different regulatory regimes on pricing behaviour. 

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