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Aggressive orders and the resiliency of a limit order market

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Author Info
Degryse, H.
Jong, F. de
Ravenswaaij, M. van
Wuyts, G. (Tilburg University, Center for Economic Research)

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Abstract

We analyze the resiliency of a pure limit order market for large and small capitalization stocks as well as stocks with different tick sizes. We explore the issue of resiliency by investigating the order flow around aggressive orders that move prices. The impact of aggressive orders is gauged in three complementary ways. First, we look at the order flow before and after aggressive orders. We find strong persistence in the submission of aggressive orders. It takes about 50 subsequent orders before the order flow returns to its unconditional pattern. Second, we describe and estimate the effect of aggressive orders on prices. The estimated price impact is realized immediately, i.e. there are no lagged price effects. However, due to correlated order flow, prices do move both before and after the submission of aggressive orders. As an explanatory variable, both aggressiveness and order size of aggressive orders are important in explaining price effects. Both firm size and tick size are important in explaining the variation of the impact of order aggressiveness. Small firms exhibit a larger price impact. A larger tick size implies somewhat larger price effects.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 80.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200280

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Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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. Griffiths, Mark D. & Smith, Brian F. & Turnbull, D. Alasdair S. & White, Robert W., 2000. "The costs and determinants of order aggressiveness," Journal of Financial Economics, Elsevier, vol. 56(1), pages 65-88, April. [Downloadable!] (restricted)
  2. Foucault, Thierry & Kadan, Ohad & Kandel, Eugene, 2001. "Limit Order Book as a Market for Liquidity," CEPR Discussion Papers 2889, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August. [Downloadable!] (restricted)
  4. 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)
  5. Ahn, Hee-Joon & Cao, Charles Q. & Choe, Hyuk, 1998. "Decimalization and competition among stock markets: Evidence from the Toronto Stock Exchange cross-listed securities," Journal of Financial Markets, Elsevier, vol. 1(1), pages 51-87, April. [Downloadable!] (restricted)
  6. Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, 04. [Downloadable!] (restricted)
  7. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  8. Bacidore, Jeffrey M., 1997. "The Impact of Decimalization on Market Quality: An Empirical Investigation of the Toronto Stock Exchange," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 92-120, April. [Downloadable!] (restricted)
  9. 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)
  10. 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.
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  12. Burton Hollifield & Robert Miller & Patrik Sandas & Joshua Slive, . "Liquidity Supply and Demand: Empirical Evidence from the Vancouver Stock Exchange," GSIA Working Papers 1999-E19, Carnegie Mellon University, Tepper School of Business. [Downloadable!]
  13. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September. [Downloadable!] (restricted)
  14. Hasbrouck, Joel, 1991. "The Summary Informativeness of Stock Trades: An Econometric Analysis," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(3), pages 571-95. [Downloadable!] (restricted)
  15. McInish, Thomas H & Wood, Robert A, 1992. " An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks," Journal of Finance, American Finance Association, vol. 47(2), pages 753-64, June. [Downloadable!] (restricted)
  16. 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.
  17. Cordella, Tito & Foucault, Thierry, 1999. "Minimum Price Variations, Time Priority, and Quote Dynamics," Journal of Financial Intermediation, Elsevier, vol. 8(3), pages 141-173, July. [Downloadable!] (restricted)
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  18. Griffiths, Mark D. & Smith, Brian F. & Turnbull, D. Alasdair S. & White, Robert W., 1998. "The Role of Tick Size in Upstairs Trading and Downstairs Trading," Journal of Financial Intermediation, Elsevier, vol. 7(4), pages 393-417, October. [Downloadable!] (restricted)
  19. Hausman, Jerry A. & Lo, Andrew W. & MacKinlay, A. Craig, 1992. "An ordered probit analysis of transaction stock prices," Journal of Financial Economics, Elsevier, vol. 31(3), pages 319-379, June. [Downloadable!] (restricted)
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  20. Bruno Biais & Pierre Hillion & Chester Spatt, 1999. "Price Discovery and Learning during the Preopening Period in the Paris Bourse," Journal of Political Economy, University of Chicago Press, vol. 107(6), pages 1218-1248, December. [Downloadable!] (restricted)
  21. Burton Hollifield & Robert A. Miller & Patrik Sandas, 2004. "Empirical Analysis of Limit Order Markets," Review of Economic Studies, Blackwell Publishing, vol. 71(4), pages 1027-1063, October. [Downloadable!] (restricted)
    Other versions:
Full references

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. 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:
  2. David Abad & Antonio Rubia, 2004. "Estimating The Probability Of Informed Trading: Further Evidence From An Order-Driven Market," Working Papers. Serie AD 2004-38, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  3. Jeremy Large, 2007. "Estimating Quadratic Variation When Quoted Prices Change by a Constant Increment," Economics Series Working Papers 340, University of Oxford, Department of Economics. [Downloadable!]
  4. Gur Huberman & Werner Stanzl, 2005. "Optimal Liquidity Trading," Review of Finance, Springer, vol. 9(2), pages 165-200, 06. [Downloadable!] (restricted)
    Other versions:
  5. Jeremy Large, 2005. "Estimating quadratic variation when quoted prices jump by a constant increment," OFRC Working Papers Series 2005fe05, Oxford Financial Research Centre. [Downloadable!]
    Other versions:
  6. GRAMMIG, Joachim & HEINEN, AndrŽas & RENGIFO, Erick, 2004. "Trading activity and liquidity supply in a pure limit order book market," CORE Discussion Papers 2004058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  7. Adam Blazejewski & Richard Coggins, 2004. "A piecewise linear model for trade sign inference," Finance 0412012, EconWPA. [Downloadable!]
  8. Degryse, H.A., 2007. "Competition on Financial Markets: Does Market Design Matter?," Discussion Paper 2007-004, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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