The apparent conflict between the level of resources dedicated to technical analysis by practitioners and academic theories of market efficiency is a long-standing puzzle. We explore a previously unexamined feature of technical analysis–namely its relation to liquidity provision. We demonstrate that support and resistance levels coincide with peaks in depth on the limit order book and moving average forecasts reveal information about the relative position of depth on the book. Furthermore, we show that these relationships stem from technical rules locating depth already in place on the limit order book.

In 1997, the Securities and Exchange Commission enacted significant reforms in U.S. markets. Several studies document that the new order handling rules increased competition for Nasdaq stocks, but the reforms were designed with an additional goal in mind—to increase quote competition for the trading of NYSE-listed securities on Nasdaq (i.e., third market trading). An evaluation of the reforms in the third market indicates that they did not achieve this objective. Instead, both quote quality and quoting frequency were diminished, due primarily to elimination of the excess spread rule. This suggests that more significant changes are needed to increase inter-exchange competition.

The apparent conflict between the level of resources dedicated to technical analysis by practitioners and academic theories of market efficiency is a long-standing puzzle. We explore a previously unexamined feature of technical analysis — namely its relation to liquidity provision. We demonstrate that support and resistance levels coincide with peaks in depth on the limit order book and moving average forecasts reveal information about the relative position of depth on the book. Furthermore, we show that these relationships stem from technical rules locating depth already in place on the limit order book.