Order Aggressiveness and Quantity: How Are They Determined in a Limit Order Market?
AbstractDealers trading in a limit order market must choose both the order aggressiveness and the quantity for their orders. We empirically investigate how dealers jointly make these decisions in the foreign exchange market using a unique simultaneous equations model. The model uses an ordered probit model to account for the discrete nature of order aggressiveness and a censored regression model to capture the clustering of orders placed at the smallest available quantity, $1 million. We find evidence of a clear trade-off between order aggressiveness and quantity: more aggressive orders tend to be smaller in size. The increased competition (demand) suggested by increased depth on the same (opposite) side of the market leads to less (more) aggressive orders in smaller (larger) size. This holds for the depths at both the best and off-best prices, even though off-best depths are not observable to dealers.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 07-23.
Length: 46 pages
Date of creation: 2007
Date of revision:
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Exchange rates; Financial markets;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-09 (All new papers)
- NEP-DCM-2007-04-09 (Discrete Choice Models)
- NEP-MST-2007-04-09 (Market Microstructure)
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