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Technology and liquidity provision: The blurring of traditional definitions

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  • Hasbrouck, Joel
  • Saar, Gideon
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    Abstract

    Limit orders are usually viewed as patiently supplying liquidity. We investigate the trading of one hundred Nasdaq-listed stocks on INET, a limit order book. In contrast to the usual view, we find that over one-third of nonmarketable limit orders are cancelled within two seconds. We investigate the role these "fleeting orders" play in the market and test specific hypotheses about their uses. We find evidence consistent with dynamic trading strategies whereby traders chase market prices or search for latent liquidity. We show that fleeting orders are a relatively recent phenomenon, and suggest that they have arisen from a combination of factors that includes improved technology, an active trading culture, market fragmentation, and an increasing utilization of latent liquidity.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 12 (2009)
    Issue (Month): 2 (May)
    Pages: 143-172

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    Handle: RePEc:eee:finmar:v:12:y:2009:i:2:p:143-172

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    Web page: http://www.elsevier.com/locate/finmar

    Related research

    Keywords: Limit order Order strategy Liquidity Nasdaq;

    References

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    1. Foucault, Thierry & Kadan, Ohad & Kandel, Eugene, 2001. "Limit Order Book as a Market for Liquidity," CEPR Discussion Papers 2889, C.E.P.R. Discussion Papers.
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    Citations

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    Cited by:
    1. Yacine Aït-Sahalia & Mehmet Saglam, 2013. "High Frequency Traders: Taking Advantage of Speed," NBER Working Papers 19531, National Bureau of Economic Research, Inc.
    2. Michael Melvin & Lukas Menkhoff & Maik Schmeling, 2009. "Exchange Rate Management in Emerging Markets: Intervention via an Electronic Limit Order Book," CESifo Working Paper Series 2656, CESifo Group Munich.
    3. Menkhoff, Lukas & Schmeling, Maik, 2010. "Trader see, trader do: How do (small) FX traders react to large counterparties' trades?," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1283-1302, November.
    4. Biais, Bruno & Weill, Pierre-Olivier, 2009. "Liquidity Shocks and Order Book Dynamics," IDEI Working Papers 550, Institut d'Économie Industrielle (IDEI), Toulouse.
    5. Chakrabarty, Bidisha & Corwin, Shane A. & Panayides, Marios A., 2011. "When a halt is not a halt: An analysis of off-NYSE trading during NYSE market closures," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 361-386, July.
    6. Degryse, H.A. & Jong, F.C.J.M. de & Kervel, V.L. van, 2011. "The Impact of Dark and Visible Fragmentation on Market Quality (Replaces CentER Discussion Paper 2011-051)," Discussion Paper 2011-069, Tilburg University, Center for Economic Research.
    7. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
    8. Valenzuela, Marcela & Zer, Ilknur, 2013. "Competition, signaling and non-walking through the book: Effects on order choice," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5421-5435.
    9. Menkhoff, Lukas & Schmeling, Maik, 2010. "Whose trades convey information? Evidence from a cross-section of traders," Journal of Financial Markets, Elsevier, vol. 13(1), pages 101-128, February.
    10. Foucault, Thierry & Kadan, Ohad & Kandel, Eugene, 2009. "Liquidity cycles and make/take fees in electronic markets," CEPR Discussion Papers 7551, C.E.P.R. Discussion Papers.
    11. Menkhoff, Lukas & Osler, Carol L. & Schmeling, Maik, 2010. "Limit-order submission strategies under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2665-2677, November.
    12. Carrion, Allen, 2013. "Very fast money: High-frequency trading on the NASDAQ," Journal of Financial Markets, Elsevier, vol. 16(4), pages 680-711.
    13. Scholtus, Martin & van Dijk, Dick & Frijns, Bart, 2014. "Speed, algorithmic trading, and market quality around macroeconomic news announcements," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 89-105.

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