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Empirical Analysis of Limit Order Markets

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Author Info
Burton Hollifield
Robert Miller
Patrik Sandas

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Abstract

This paper analyzes order placement strategies in a limit order market. Traders submitting market or limit orders to the limit order book trade off the order price, the execution probability, and the winner's curse risk associated with different feasible order choices. Their optimal order strategy is characterized by a monotone function which maps the liquidity demand of the investors into their subjective execution probabilities. The primitives of this model are the time varying shock that is common to all valuations, as well as the probability distribution of private valuations, assumed to be a time invariant, independently and identically distributed random variable. Using data from the Stockholm Stock Exchange, we compute a semiparametric estimator of the primitives underlying the model. The estimated order strategies are consistent with the theoretical trade-offs. Specification tests based on the monotonicity of the optimal order strategy finds little evidence against the monotonicity restrictions.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number -290183991.

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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.:
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  4. Laffont, Jean-Jacques & Vuong, Quang, 1996. "Structural Analysis of Auction Data," American Economic Review, American Economic Association, vol. 86(2), pages 414-20, May. [Downloadable!] (restricted)
  5. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(4), pages 789-816.
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  7. Michael A. Goldstein & Kenneth A. Kavajecz, . "Liquidity Provision during Circuit Breakers and Extreme Market Movements," Rodney L. White Center for Financial Research Working Papers 1-00, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
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  8. 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)
  9. Kenneth A. Kavajecz, 1999. "A Specialist's Quoted Depth and the Limit Order Book," Journal of Finance, American Finance Association, vol. 54(2), pages 747-771, 04. [Downloadable!] (restricted)
  10. 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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  11. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
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  13. Robinson, P M, 1989. "Hypothesis Testing in Semiparametric and Nonparametric Models for Econometric Time Series," Review of Economic Studies, Blackwell Publishing, vol. 56(4), pages 511-34, October. [Downloadable!] (restricted)
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  17. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. " An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, vol. 50(5), pages 1655-89, December. [Downloadable!] (restricted)
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  19. Ready, Mark J, 1999. "The Specialist's Discretion: Stopped Orders and Price Improvement," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(5), pages 1075-1112.
  20. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, vol. 68(4), pages 799-838, July.
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  21. Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(1), pages 103-50.
  22. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March. [Downloadable!] (restricted)
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(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. Degryse, H. & Jong, F. de & Ravenswaaij, M. van & Wuyts, G., 2002. "Aggressive orders and the resiliency of a limit order market," Discussion Paper 80, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  2. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2003. "Limit Order Book as a Market for Liquidity," Discussion Paper Series dp321, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem. [Downloadable!]
    Other versions:
  3. Anna Obizhaeva & Jiang Wang, 2005. "Optimal Trading Strategy and Supply/Demand Dynamics," NBER Working Papers 11444, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Pedro Mira & Victor Aguirregabiria, 2007. "Dynamic Discrete Choice Structural Models: A Survey," Working Papers wp2007_0711, CEMFI. [Downloadable!]
    Other versions:
  5. 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!]
  6. Jung-Wook Kim & Jason Lee & Randall Morck, 2009. "Characteristics of Observed Limit Order Demand and Supply Schedules for Individual Stocks," NBER Working Papers 14733, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Menzie D. Chinn & Michael J. Moore, 2008. "Private Information and a Macro Model of Exchange Rates: Evidence from a Novel Data Set," NBER Working Papers 14175, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Jeremy Large, 2006. "A Market-Clearing Role for Inefficiency on a Limit Order Book," Economics Papers 2006-W08, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
    Other versions:
  9. Pantisa Pavabutr & Sukanya Prangwattananon, 2009. "Tick size change on the Stock Exchange of Thailand," Review of Quantitative Finance and Accounting, Springer, vol. 32(4), pages 351-371, May. [Downloadable!] (restricted)
  10. Jeremy Large, 2004. "Cancellation and Uncertainty Aversion on Limit Order Books," Economics Papers 2004-W05, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
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  11. Pavabutra, Pantisa & Prangwattananon, Sukanya, 2008. "Tick Size Change on the Stock Exchange of Thailand," CEI Working Paper Series 2008-9, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  12. Hollifield, Burton & Miller, Robert A. & Sandås, Patrik & Slive, Joshua, 2002. "Liquidity Supply and Demand in Limit Order Markets," CEPR Discussion Papers 3676, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Michael A. Goldstein & Kenneth A. Kavajecz, . "Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the NYSE," Rodney L. White Center for Financial Research Working Papers 14-98, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
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  14. Söderberg, Jonas, 2008. "Liquidity on the Scandinavian Order-driven Stock Exchanges," CAFO Working Papers 2009:11, Centre for Labour Market Policy Research (CAFO), School of Management and Economics, Växjö University. [Downloadable!]
  15. Luana Gava, 2005. "The Speed Of Limit Order Execution In The Spanish Stock Exchange," Business Economics Working Papers wb057718, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  16. Helena Beltran & Albert J. Menkveld, 2004. "Understanding limit order book depth: conditioning on trade informativeness," Econometric Society 2004 Latin American Meetings 142, Econometric Society. [Downloadable!]
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