Spread and depth adjustment process: an analysis of high-quality microstructure data

This study examines liquidity dynamics by observing changes in bid-ask spreads and market depths in response to new information and trading activities. By analysing high-quality data from the KOSPI200 futures market, we determine that spread and depth effectively adjust to new information and trading activities. Our empirical results indicate that the size of the equilibrium spread is positively related to trade frequency, the degree of informed trading, volatility and the relative portions of individual trades, and negatively related to trade size. We also find that equilibrium depth is positively associated with the trade frequency and volatility, and negatively associated with the informed trading.