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

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  • Ingrid Lo
  • Stephen G. Sapp
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    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/wp-content/uploads/2010/03/wp07-23.pdf
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    Bibliographic Info

    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
    Date of revision:
    Handle: RePEc:bca:bocawp:07-23

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    Related research

    Keywords: Exchange rates; Financial markets;

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    References

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    1. Robert F. Engle, 2000. "The Econometrics of Ultra-High Frequency Data," Econometrica, Econometric Society, Econometric Society, vol. 68(1), pages 1-22, January.
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    13. Andrew Ellul, 2003. "A Comprehensive Test of Order Choice Theory:Recent Evidence from the NYSE," FMG Discussion Papers, Financial Markets Group dp471, Financial Markets Group.
    14. Viswanathan, S. & Wang, James J. D., 2002. "Market architecture: limit-order books versus dealership markets," Journal of Financial Markets, Elsevier, Elsevier, vol. 5(2), pages 127-167, April.
    15. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 576-605, June.
    16. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, American Finance Association, vol. 49(4), pages 1127-61, September.
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    Cited by:
    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. EGSeI.

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