Order flow dynamics around extreme price changes on an emerging stock market

TL;DR

This study analyzes high-frequency order flow data from the Shenzhen Stock Exchange to understand the dynamics and roles of different investors around extreme price changes, revealing the influence of institutional investors.

Contribution

It provides a detailed high-frequency analysis of order flow dynamics and highlights the significant role of institutional investors in large price fluctuations on an emerging stock market.

Findings

Price reversals occur with permanent impact after extreme events.

Order flow metrics peak before and decay after large price changes.

Institutional investors exhibit more aggressive and informed trading behaviors.

Abstract

We study the dynamics of order flows around large intraday price changes using ultra-high-frequency data from the Shenzhen Stock Exchange. We find a significant reversal of price for both intraday price decreases and increases with a permanent price impact. The volatility, the volume of different types of orders, the bid-ask spread, and the volume imbalance increase before the extreme events and decay slowly as a power law, which forms a well-established peak. The volume of buy market orders increases faster and the corresponding peak appears earlier than for sell market orders around positive events, while the volume peak of sell market orders leads buy market orders in the magnitude and time around negative events. When orders are divided into four groups according to their aggressiveness, we find that the behaviors of order volume and order number are similar, except for buy limit orders and canceled orders that the peak of order number postpones two minutes later after the peak of order volume, implying that investors placing large orders are more informed and play a central role in large price fluctuations. We also study the relative rates of different types of orders and find differences in the dynamics of relative rates between buy orders and sell orders and between individual investors and institutional investors. There is evidence showing that institutions behave very differently from individuals and that they have more aggressive strategies. Combing these findings, we conclude that institutional investors are more informed and play a more influential role in driving large price fluctuations.