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Cancellation and Uncertainty Aversion on Limit Order Books

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  • Jeremy Large

    () (Nuffield College, Oxford University, UK)

Abstract

This paper models limit order books where each trader is uncertain of the underlying distribution in the asset's value to others. If this uncertainty is rapidly resolved, eeting limit orders are submitted and quickly cancelled. This enhances liquidity supply, but leaves intact established comparative statics results on spreads. However, risk neutral liquidity suppliers are averse to persistent uncertainty due to concavity in the function describing limit order utility, and spreads widen. This helps explain wide spreads in the morning. The model describes traders who in equilibrium correctly anticipate market orders' endogenous stochastic intensities. It highlights how limit orders queue for execution.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2004/W5/JLargeLimitOBFeb404.pdf
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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2004-W05.

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Length: 31 pages
Date of creation: 25 Feb 2004
Date of revision:
Handle: RePEc:nuf:econwp:045

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Web page: http://www.nuff.ox.ac.uk/economics/

Related research

Keywords: market microstructure; limit order book; fleeting orders; order cancellation.;

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References

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  1. 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.
  2. Chiang, Raymond & Venkatesh, P C, 1988. " Insider Holdings and Perceptions of Information Asymmetry: A Note," Journal of Finance, American Finance Association, vol. 43(4), pages 1041-48, September.
  3. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
  4. Hollifield, Burton & Miller, Robert & Sandås, Patrik, 2001. "Empirical Analysis of Limit Order Markets," CEPR Discussion Papers 2843, C.E.P.R. Discussion Papers.
  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.
  6. 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.
  7. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  8. Bowsher, Clive G., 2007. "Modelling security market events in continuous time: Intensity based, multivariate point process models," Journal of Econometrics, Elsevier, vol. 141(2), pages 876-912, December.
  9. 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.
  10. 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.
  11. 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.
  12. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
  13. 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.
  14. Domowitz, Ian & Wang, Jianxin, 1994. "Auctions as algorithms : Computerized trade execution and price discovery," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 29-60, January.
  15. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
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Cited by:
  1. Hans Degryse & Mark Van Achter & Gunther Wuyts, 2004. "Dynamic order Submission Strategies with Competition between a Dealer Market and a Crossing Network," Center for Economic Studies - Discussion papers ces0415, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  2. Hasbrouck, Joel & Saar, Gideon, 2009. "Technology and liquidity provision: The blurring of traditional definitions," Journal of Financial Markets, Elsevier, vol. 12(2), pages 143-172, May.

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