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Order Aggressiveness and Quantity: How Are They Determined in a Limit Order Market?

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Author Info
Ingrid Lo
Stephen G. Sapp
Abstract

Dealers 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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File URL: http://www.bankofcanada.ca/en/res/wp/2007/wp07-23.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 07-23.

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Length: 46 pages
Date of creation: 2007
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Handle: RePEc:bca:bocawp:07-23

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Related research
Keywords: 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:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Viswanathan, S. & Wang, James J. D., 2002. "Market architecture: limit-order books versus dealership markets," Journal of Financial Markets, Elsevier, vol. 5(2), pages 127-167, April. [Downloadable!] (restricted)
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  3. Michael J. Sager & Mark P. Taylor, 2006. "Under the microscope: the structure of the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 81-95. [Downloadable!]
  4. Cohen, Kalman J, et al, 1981. "Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 287-305, April. [Downloadable!] (restricted)
  5. Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, vol. 2(2), pages 99-134, May. [Downloadable!] (restricted)
  6. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
  7. Domowitz, Ian, 1993. "A taxonomy of automated trade execution systems," Journal of International Money and Finance, Elsevier, vol. 12(6), pages 607-631, December. [Downloadable!] (restricted)
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  8. Martin D. D. Evans, 2001. "FX Trading and Exchange Rate Dynamics," NBER Working Papers 8116, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Robert F. Engle, 2000. "The Econometrics of Ultra-High Frequency Data," Econometrica, Econometric Society, vol. 68(1), pages 1-22, January.
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  10. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  11. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-61, September. [Downloadable!] (restricted)
  12. Ho, Thomas S Y & Stoll, Hans R, 1983. " The Dynamics of Dealer Markets under Competition," Journal of Finance, American Finance Association, vol. 38(4), pages 1053-74, September. [Downloadable!] (restricted)
  13. Handa, Puneet & Schwartz, Robert A, 1996. " Limit Order Trading," Journal of Finance, American Finance Association, vol. 51(5), pages 1835-61, December. [Downloadable!] (restricted)
  14. Kumar, Praveen & Seppi, Duane J, 1992. " Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-502, September. [Downloadable!] (restricted)
  15. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Coluzzi, Chiara & Ginebri, Sergio, 2008. "Order Dynamics in the Italian Treasury Security Wholesale Secondary Market," Economics & Statistics Discussion Papers esdp08050, University of Molise, Dept. SEGeS. [Downloadable!]
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