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Competition, signaling and non-walking through the book: Effects on order choice

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  • Valenzuela, Marcela
  • Zer, Ilknur

Abstract

We investigate the effects of competition and signaling in a pure order driven market and examine the trading patterns of agents when walking through the book is not allowed. Our results suggest that the variables capturing the cost of a large market order are not informative for an impatient trader under this market mechanism. We also document that the competition effect is not present only at the top of the book but persistent beyond the best quotes. Moreover, it dominates the signaling effect for both a limit order and a market order trader. Finally, we show that institutional investors’ order submission strategies are characterized by only a few pieces of the limit order book information. This is consistent with informed traders placing orders based on their own private valuations rather than the state of the book.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5421-5435
    DOI: 10.1016/j.jbankfin.2013.04.014
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    Cited by:

    1. Valenzuela, Marcela & Zer, Ilknur & Fryzlewicz, Piotr & Rheinländer, Thorsten, 2015. "Relative liquidity and future volatility," Journal of Financial Markets, Elsevier, vol. 24(C), pages 25-48.
    2. Valenzuela, Marcela & Zer, Ilknur & Fryzlewicz, Piotr & Rheinlander, Thorsten, 2015. "Relative liquidity and future volatility," LSE Research Online Documents on Economics 62181, London School of Economics and Political Science, LSE Library.
    3. Tseng, Yi-Heng & Chen, Shu-Heng, 2015. "Limit order book transparency and order aggressiveness at the closing call: Lessons from the TWSE 2012 new information disclosure mechanism," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 241-272.
    4. Piotr Fryzlewicz & Thorsten Rheinlander & Marcela Valenzuela & Ilknur Zer, 2014. "Relative Liquidity and Future Volatility," Finance and Economics Discussion Series 2014-45, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Limit order book; Order aggressiveness; Order-driven markets; Walking through the book; Competition; Signaling;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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