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The power of patience: a behavioural regularity in limit-order placement

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  • Ilija Zovko
  • J Doyne Farmer

Abstract

In this paper we demonstrate a striking regularity in the way people place limit orders in financial markets, using a data set consisting of roughly two million orders from the London Stock Exchange. We define the relative limit price as the difference between the limit price and the best price available. Merging the data from 50 stocks, we demonstrate that for both buy and sell orders, the unconditional cumulative distribution of relative limit prices decays roughly as a power law with exponent approximately -1.5. This behaviour spans more than two decades, ranging from a few ticks to about 2000 ticks. Time series of relative limit prices show interesting temporal structure, characterized by an autocorrelation function that asymptotically decays as C(τ)∼τ-0.4. Furthermore, relative limit price levels are positively correlated with and are led by price volatility. This feedback may potentially contribute to clustered volatility.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 2 (2002)
Issue (Month): 5 ()
Pages: 387-392

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Handle: RePEc:taf:quantf:v:2:y:2002:i:5:p:387-392

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Cited by:
  1. Gu, Gao-Feng & Chen, Wei & Zhou, Wei-Xing, 2008. "Empirical regularities of order placement in the Chinese stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(13), pages 3173-3182.
  2. Rene Carmona & Kevin Webster, 2013. "The Self-Financing Equation in High Frequency Markets," Papers 1312.2302, arXiv.org.
  3. Szabolcs Mike & J. Doyne Farmer, 2005. "An empirical behavioral model of price formation," Papers physics/0509194, arXiv.org, revised Oct 2005.
  4. Thomas Lux, 2006. "Applications of Statistical Physics in Finance and Economics," Working Papers wpn06-07, Warwick Business School, Finance Group.
  5. Ni, Xiao-Hui & Jiang, Zhi-Qiang & Gu, Gao-Feng & Ren, Fei & Chen, Wei & Zhou, Wei-Xing, 2010. "Scaling and memory in the non-Poisson process of limit order cancelation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(14), pages 2751-2761.
  6. Anton Bovier & Jiří Černý & Ostap Hryniv, 2006. "The Opinion Game: Stock Price Evolution From Microscopic Market Modeling," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 91-111.
  7. Daniel Fricke & Thomas Lux, 2013. "The Effects of a Financial Transaction Tax in an Artificial Financial Market," Kiel Working Papers 1868, Kiel Institute for the World Economy.
  8. Jose Blanchet & Xinyun Chen, 2013. "Continuous-time Modeling of Bid-Ask Spread and Price Dynamics in Limit Order Books," Papers 1310.1103, arXiv.org.
  9. Adam Blazejewski & Richard Coggins, 2004. "A local non-parametric model for trade sign inference," Finance 0408009, EconWPA.

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