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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.

Suggested Citation

  • Easley, David & O'Hara, Maureen, 1991. "Order Form and Information in Securities Markets," Journal of Finance, American Finance Association, vol. 46(3), pages 905-927, July.
    • Handle: RePEc:bla:jfinan:v:46:y:1991:i:3:p:905-27
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    Citations

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    Cited by:

    1. Rossi, S & Tinn, K, 2012. "Man or Machine? Rational trading without information about fundamentals," Working Papers 12194, Imperial College, London, Imperial College Business School.
    2. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    3. Ripamonti, Alexandre, 2019. "Capital Structure Adjustments and Asymmetric Information," MPRA Paper 96936, University Library of Munich, Germany.
    4. 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.
    5. 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.
    6. Karl Ludwig Keiber, 2005. "The Informational Content of Transactions," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 19(1), pages 47-60, June.
    7. 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.
    8. 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.
    9. Ripamonti, Alexandre, 2016. "Corwin-Schultz bid-ask spread estimator in the Brazilian stock market," MPRA Paper 79459, University Library of Munich, Germany.
    10. Young-Hye Cho & Robert F. Engle, 1999. "Modeling the Impacts of Market Activity on Bid-Ask Spreads in the Option Market," NBER Working Papers 7331, National Bureau of Economic Research, Inc.
    11. 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.
    12. Ranaldo, Angelo & Somogyi, Fabricius, 2021. "Asymmetric information risk in FX markets," Journal of Financial Economics, Elsevier, vol. 140(2), pages 391-411.
    13. Juan Raposo, 2003. "Les stratégies de placement d'ordres : le cas des ordres à quantité cachée," Post-Print halshs-00163255, HAL.
    14. 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.
    15. Rossi, Stefano & Tinn, Katrin, 2021. "Rational quantitative trading in efficient markets," Journal of Economic Theory, Elsevier, vol. 191(C).
    16. Hautsch, Nikolaus, 2002. "Modelling Intraday Trading Activity Using Box-Cox-ACD Models," CoFE Discussion Papers 02/05, University of Konstanz, Center of Finance and Econometrics (CoFE).
    17. 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.
    18. 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.
    19. 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.
    20. Rakovská, Zuzana, 2021. "Composite survey sentiment as a predictor of future market returns: Evidence for German equity indices," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 473-495.
    21. 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.
    22. Karl Ludwig Keiber, 2008. "Price discovery in the presence of boundedly rational agents," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 235-249.
    23. Madhavan, Ananth & Porter, David & Weaver, Daniel, 2005. "Should securities markets be transparent?," Journal of Financial Markets, Elsevier, vol. 8(3), pages 265-287, August.

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