Journal of Financial and Quantitative Analysis

Research Articles

Detecting Liquidity Traders

Avner Kalaya1 and Avi Wohla2

a1 Tel Aviv University and University of Utah, Faculty of Management, Tel Aviv University, POB 39010, Tel Aviv 69978, Israel.

a2 Tel Aviv University, Faculty of Management, POB 39010, Tel Aviv 69978, Israel.


We develop a measure (based on the relative slopes of the demand and supply schedules) quantifying the asymmetric presence of liquidity traders in the market: a steeper slope of the demand (supply) schedule indicates a concentration of liquidity traders on the demand (supply) side. Using the opening session of the Tel Aviv Stock Exchange, we demonstrate the predictive power of our measure. Consistent with theory, we find that the concentration of liquidity traders on the demand (supply) side is negatively (positively) correlated with future returns. We find that liquidity traders are likely to arrive at the market together (commonality).


We thank the Tel Aviv Stock Exchange for providing us with the data. For very useful comments and suggestions, we thank Yakov Amihud, Doron Avramov, Shmuel Baruch, Jonathan Berk, Stephen Brown (the editor), Loran Chollete, Tarun Chordia, David Feldman, Thierry Foucault, Martin Hellwig, Eugene Kandel, Shmuel Kandel, Ron Kaniel, Pete Kyle, Spiros Martzoukos, Roni Michaely, Barbara Rindi, Gideon Saar (the referee), Orly Sade, Oded Sarig, Andrei Simonov, Pascal St-Amour, Richard Stanton, S. Viswanathan, Masahiro Watanabe, the participants in the seminars of Ben Gurion University, Duke University, the Federal Reserve Bank of Washington, Hebrew University, HEC Lausanne, Interdisciplinary Center Herzliya, New York University, Norwegian School of Management, the Securities and Exchange Commission, Tel Aviv University, University of Amsterdam, University of California at Berkeley, University of Copenhagen, University of Utah, University of Vienna, University of Zurich, and participants in the European Finance Association meetings 2002 in Berlin, the conference on capital markets at the University of Cyprus 2002, the MTS-CEPR conference in Toulouse 2003, the Israeli Economic Association 2004, the CEPR Symposium at Gerzensee 2004, Norges Bank/BI Conference on the Microstructure of Equity and Currency Markets 2005. Wohl thanks the David Orgler and Family Research Fund for Banking and Finance for partial financial support. A previous version of this paper was entitled, “The Information Content of the Demand and Supply Schedules of Stocks.”