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The determinants of limit order cancellations

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  • Petter Dahlström
  • Björn Hagströmer
  • Lars L. Nordén

Abstract

Almost all limit orders are canceled. We examine two economic channels that can motivate cancellations: reductions in the expected profit at execution, and reductions in the probability of execution. An order‐level analysis shows that changes in depth at the best bid and offer prices, as well as changes in the order queue position, influence cancellation in a way consistent with the former channel, that market makers monitor the expected profit at execution of each limit order. Although buy‐side investors use passive orders extensively, our findings indicate that limit order cancellations on aggregate are best understood through models of liquidity provision.

Suggested Citation

  • Petter Dahlström & Björn Hagströmer & Lars L. Nordén, 2024. "The determinants of limit order cancellations," The Financial Review, Eastern Finance Association, vol. 59(1), pages 181-201, February.
    • Handle: RePEc:bla:finrev:v:59:y:2024:i:1:p:181-201
    DOI: 10.1111/fire.12363
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    References listed on IDEAS

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