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What Does the Order Book Depth Tell Us about Price Impact?
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.ORCID iD: 0000-0003-3404-4960
(English)Manuscript (preprint) (Other academic)
Abstract [en]

I estimate the price impact implied by limit order book (LOB) depth, using methodology from Sandås (2001). The idea is that LOB depth reflects market makers’ beliefs about the price impact of market orders. I find the price impact estimates are slightly lower than those from a structural vector autoregressive model, but slightly higher than those from price impact regression. Thus, the LOB-implied price impact estimates match those from benchmark models, contradicting earlier research. I shed new light on limit order informativeness, contributing to contemporary literature on the increased information content of limit orders relative to market orders.

Keywords [en]
Market microstructure
National Category
Business Administration
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-173914OAI: oai:DiVA.org:su-173914DiVA, id: diva2:1356518
Available from: 2019-10-01 Created: 2019-10-01 Last updated: 2019-10-02Bibliographically approved
In thesis
1. New Insights on Computerized Trading: Implications of Frequently Revised Trading Decisions
Open this publication in new window or tab >>New Insights on Computerized Trading: Implications of Frequently Revised Trading Decisions
2019 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

Computerized trading may be viewed as an aspect of modernization of financial markets. This dissertation contains four articles that in different ways examine to what extent the modernization influences the economics of the markets.

Article 1 investigates transaction costs for large orders which are split up by execution algorithms to be executed in smaller pieces.  I find that the costs associated with not being able to execute all pieces are substantial. These costs can be lowered by speeding up the trading pace but at the expense of higher costs for the successfully executed pieces.

Article 2 investigates the strategies trading firms pursue in particular cases, known as toxic arbitrage opportunities. We find that trading firms, that otherwise behave as market makers, morph into liquidity takers as toxic arbitrage opportunities emerge. In contrast to common belief, market makers are net beneficiaries of toxic arbitrage, and this finding puts into question whether the amount of toxic arbitrage leads to wider bid-ask spreads.

Article 3 investigates the information content of limit orders in an alternative way by studying the price impact implied by the depth in the limit order book. I find that the price impact estimates are slightly lower relative to those from a structural vector auto regressive model, but slightly higher compared to those from a price impact regression. Thus, the limit order book implied price impact estimates match those from benchmark models, and this finding contradicts earlier research.

Article 4 investigates the economic rationale behind limit order cancellations. We put forth a model that explains the frequent limit order cancellations seen in today’s markets, and we test its predictions using a unique data set from Nasdaq. Our results points towards that frequent order cancellations is a benign feature of modern market making, as opposed to different types of manipulative behavior.

Place, publisher, year, edition, pages
Stockholm: Stockholm Business School, Stockholm University, 2019. p. 18
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-173359 (URN)978-91-7797-869-5 (ISBN)978-91-7797-870-1 (ISBN)
Public defence
2019-11-06, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 14:00 (English)
Opponent
Supervisors
Note

At the time of the doctoral defense, the following papers were unpublished and had a status as follows: Paper 1: Manuscript. Paper 2: Manuscript. Paper 3: Manuscript. Paper 4: Manuscript.

Available from: 2019-10-14 Created: 2019-09-22 Last updated: 2019-10-18Bibliographically approved

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CiteExportLink to record
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Citation style
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