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The submission of limit orders or market orders: The role of timing and information in the Reuters D2000-2 system

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  • Lo, Ingrid
  • Sapp, Stephen G.
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    Abstract

    Recent work in the market microstructure literature suggests that the speed with which orders arrive in the market impacts traders' order submission decisions. In this study we use an asymmetric autoregressive conditional duration (ACD) model to empirically investigate the influence on the submission of limit and market orders of changes in the time between the past submissions of different types of orders, changes in the slope of the limit order book, and changes in price uncertainty. We find that the expected time between the arrivals of successive orders in the foreign exchange market depends on the previous type of order submitted and the slope on both sides of the order book. Price uncertainty (volatility) plays a secondary role after accounting for the impact of changes in the slope of the order book. Lastly, we find that there are fundamental changes in the level of information contained in the submission of orders at the opening and closing of markets.

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    File URL: http://www.sciencedirect.com/science/article/B6V9S-4SVKSJ5-1/2/e4c42330a9fc9bfdd65a865ed11ff707
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 27 (2008)
    Issue (Month): 7 (November)
    Pages: 1056-1073

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    Handle: RePEc:eee:jimfin:v:27:y:2008:i:7:p:1056-1073

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: Market microstructure Limit order Market order Liquidity Duration;

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    Cited by:
    1. Michael R. King & Carol Osler & Dagfinn Rime, 2013. "The market microstructure approach to foreign exchange - Looking back and looking forward," Working Paper 2013/12, Norges Bank.
    2. Katarzyna Bien-Barkowska, 2011. "Distribution Choice for the Asymmetric ACD Models," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 11, pages 55-72.
    3. Cotter, John & Dowd, Kevin, 2007. "Intra-Day Seasonality in Foreign Exchange Market Transactions," MPRA Paper 3502, University Library of Munich, Germany.
    4. Katarzyna Bień-Barkowska, 2011. "Multistate asymmetric ACD model: an application to order dynamics in the EUR/PLN spot market," National Bank of Poland Working Papers 104, National Bank of Poland, Economic Institute.
    5. Lukas Menkhoff & Carol L. Osler & Maik Schmeling, 2010. "Limit-Order Submission Strategies under Asymmetric Information," CESifo Working Paper Series 3054, CESifo Group Munich.
    6. Lo, Ingrid & Sapp, Stephen G., 2010. "Order aggressiveness and quantity: How are they determined in a limit order market?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(3), pages 213-237, July.

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