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In this document, the authors investigate the role of limit orders on the liquidity provision in the Hong Kong stock market, which is based on a computerized limit-order trading system. The results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. They also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit-order traders who enter the market and place orders when liquidity is needed.

In this study, the authors hope to demonstrate the relationship between the transitory volatility and the order flow in a pure order-driven market. They examine whether this information will have a different impact on the buyers and sellers in their order placement strategies. Further, they claim that "The evidence is consistent with the view that an order-driven trading mechanism without the presence of market makers can be viable and self sustaining" ... download the eBook to read more