Commonality under market stress: Evidence from an order-driven market

Recent evidence shows that commonality in liquidity decreases at the aggregate level in a quote-driven specialist market during periods of market stress. Specialists and dealers in quote-driven markets have an affirmative obligation to provide liquidity, even if prices are falling precipitously. The purpose of our study is to investigate commonality in liquidity in a market structure without any affirmative obligation to provide liquidity (i.e., in an order-driven market). We collect intra-day data from one of the world's largest and most active order-driven markets, the Stock Exchange of Hong Kong (SEHK), and find that commonality increases during periods of market stress. We also show that larger firms tend to be more susceptible to changes in commonality than smaller firms. We hypothesize that order-driven markets behave differently from quote-driven markets under stress because order-driven market makers have a free exit option.