We test the effects of uncertainty on market liquidity using Hurricane Sandy as a natural experiment. Given the unprecedented strength, scale, and nature of the storm, the potential damages of a landfall near the Greater New York area were unpredictable and therefore uncertain. Using a difference-in-differences setting, we compare the market reactions of Real Estate Investment Trusts (REITs) with and without properties in the widely published evacuation zone of New York City prior to landfall. We find relatively less trading and wider bid-ask spreads in affected REITs. The results confirm theory on the detrimental effects of uncertainty on market functioning.

ABSTRACT We analyze the contribution to price discovery of market and limit orders by high‐frequency traders (HFTs) and non‐HFTs. While market orders have a larger individual price impact, limit orders are far more numerous. This results in price discovery occurring predominantly through limit orders. HFTs submit the bulk of limit orders and these limit orders provide most of the price discovery. Submissions of limit orders and their contribution to price discovery fall with volatility due to changes in HFTs’ behavior. Consistent with adverse selection arising from faster reactions to public information, HFTs’ informational advantage is partially explained by public information.