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Determinants of Limit Order Cancellations
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.ORCID iD: 0000-0003-3404-4960
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.ORCID iD: 0000-0003-0055-5121
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
(English)Manuscript (preprint) (Other academic)
Abstract [en]

We investigate the economic rationale behind limit order cancellations from the perspective of liquidity suppliers. We predict that an order is cancelled whenever its expected revenue no longer exceeds the expected cost and we model how order profitability variation can be determined from changes in the state of the order book and the order queue position. Our empirical evidence supports the predictions in general and for orders submitted by high-frequency trading firms in particular. Consistent with our model approach, we find that order cancellation patterns are more consistent with market making than with liquidity demand strategies.

Keywords [en]
Market microstructure
National Category
Business Administration
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-173916OAI: oai:DiVA.org:su-173916DiVA, id: diva2:1356527
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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