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Order Form and Information in Securities Markets

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  • Easley, David
  • O'Hara, Maureen

Abstract

This paper examines the effects of price-contingent orders on security prices. The authors show that a market maker who knows the type and composition of trades will set larger spreads and adjust prices faster than if price-contingent orders were not allowed. Because traders have rational expectations over the book, the authors demonstrate that uncertainty over order type reduces the variance of prices but with a corresponding loss in price informativeness. They also show that the sequence property of price-contingent orders increases the probability of large price movements. This distinction between variance and episodic price volatility has important policy implications. Copyright 1991 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 46 (1991)
Issue (Month): 3 (July)
Pages: 905-27

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Handle: RePEc:bla:jfinan:v:46:y:1991:i:3:p:905-27

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Cited by:
  1. Nikolaus Hautsch, 2002. "Modelling Intraday Trading Activity Using Box-Cox-ACD Models," CoFE Discussion Paper 02-05, Center of Finance and Econometrics, University of Konstanz.
  2. Kaminski, Kathryn M. & Lo, Andrew W., 2014. "When do stop-loss rules stop losses?," Journal of Financial Markets, Elsevier, vol. 18(C), pages 234-254.
  3. Madhavan, Ananth & Porter, David & Weaver, Daniel, 2005. "Should securities markets be transparent?," Journal of Financial Markets, Elsevier, vol. 8(3), pages 265-287, August.
  4. Ke, Mei-Chu & Huang, Yen-Sheng & Liao, Tung Liang & Wang, Ming-Hui, 2013. "The impact of transparency on market quality for the Taiwan Stock Exchange," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 330-344.
  5. Lo, Andrew W. & MacKinlay, A. Craig & Zhang, June, 2002. "Econometric models of limit-order executions," Journal of Financial Economics, Elsevier, vol. 65(1), pages 31-71, July.
  6. Keim, Donald B. & Madhavan, Ananth, 1995. "Anatomy of the trading process Empirical evidence on the behavior of institutional traders," Journal of Financial Economics, Elsevier, vol. 37(3), pages 371-398, March.
  7. Grammig, Joachim & Wellner, Marc, 2002. "Modeling the interdependence of volatility and inter-transaction duration processes," Journal of Econometrics, Elsevier, vol. 106(2), pages 369-400, February.
  8. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
  9. Savaser, Tanseli, 2011. "Exchange rate response to macronews: Through the lens of microstructure," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(1), pages 107-126, February.
  10. Engle, Robert F, 1999. "Modeling the Impacts of Market Activity on Bid-Ask Spreads in the Option Market," University of California at San Diego, Economics Working Paper Series qt6rp7g17q, Department of Economics, UC San Diego.
  11. Juan Raposo, 2003. "Les stratégies de placement d'ordres : le cas des ordres à quantité cachée," Post-Print halshs-00163255, HAL.
  12. Osler, Carol L., 2005. "Stop-loss orders and price cascades in currency markets," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 219-241, March.
  13. Aitken, Michael & Frino, Alex, 1996. "Execution costs associated with institutional trades on the Australian Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 4(1), pages 45-58, May.
  14. Karl Ludwig Keiber, 2005. "The Informational Content of Transactions," Financial Markets and Portfolio Management, Springer, vol. 19(1), pages 47-60, June.
  15. Rossi, S & Tinn, K, 2013. "Man or Machine? Rational trading without information about fundamentals," Working Papers 12194, Imperial College, London, Imperial College Business School.
  16. Puah, Chin-Hong & Wong, Shirly Siew-Ling & Habibullah, Muzafar Shah, 2012. "Rationality of business operational forecasts: evidence from Malaysian distributive trade sector," MPRA Paper 37599, University Library of Munich, Germany.
  17. Hasbrouck, Joel, 1996. "Order characteristics and stock price evolution An application to program trading," Journal of Financial Economics, Elsevier, vol. 41(1), pages 129-149, May.

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