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Pro-rata matching and one-tick futures markets

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  • Field, Jonathan
  • Large, Jeremy
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    Abstract

    We find and describe four futures markets where the bid-ask spread is bid down to the fixed price tick size practically all the time, and which match counterparties using a pro-rata rule. These four markets' offered depths at the quotes on average exceed mean market order size by two orders of magnitude, and their order cancellation rates (the probability of any given offered lot being cancelled) are significantly over 96 per cent. We develop a simple theoretical model to ex- plain these facts, where strategic complementarities in the choice of limit order size cause traders to risk overtrading by submitting over-sized limit orders, most of which they expect to cancel. --

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    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/40.

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    Date of creation: 2008
    Date of revision:
    Handle: RePEc:zbw:cfswop:200840

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    Related research

    Keywords: Limit Order Book; Pro-Rata; Tick Size; Bid-Ask Spread; Depths;

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    References

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    1. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
    2. Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
    3. Jeremy Large, 2005. "Estimating quadratic variation when quoted prices jump by a constant increment," OFRC Working Papers Series 2005fe05, Oxford Financial Research Centre.
    4. Hansen, Peter R. & Lunde, Asger, 2006. "Realized Variance and Market Microstructure Noise," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 127-161, April.
    5. Gottlieb, Gary & Kalay, Avner, 1985. " Implications of the Discreteness of Observed Stock Prices," Journal of Finance, American Finance Association, vol. 40(1), pages 135-53, March.
    6. Harris, Lawrence, 1990. "Estimation of Stock Price Variances and Serial Covariances from Discrete Observations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(03), pages 291-306, September.
    7. Harris, Lawrence E, 1994. "Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 149-78.
    8. FOUCAULT, Thierry & KADAN, Ohad & KANDEL, Eugene, 2001. "Limit order book as a market for liquidity," Les Cahiers de Recherche 728, HEC Paris.
    9. 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.
    10. Goldstein, Michael A. & A. Kavajecz, Kenneth, 2000. "Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE," Journal of Financial Economics, Elsevier, vol. 56(1), pages 125-149, April.
    11. Kadan, Ohad, 2006. "So who gains from a small tick size?," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 32-66, January.
    12. Bernhardt, Dan & Hughson, Eric, 1996. "Discrete Pricing and the Design of Dealership Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 148-182, October.
    13. 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.
    14. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
    15. Ball, Clifford A, 1988. " Estimation Bias Induced by Discrete Security Prices," Journal of Finance, American Finance Association, vol. 43(4), pages 841-65, September.
    16. 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.
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    Cited by:
    1. Martin D. Gould & Mason A. Porter & Stacy Williams & Mark McDonald & Daniel J. Fenn & Sam D. Howison, 2010. "Limit Order Books," Papers 1012.0349, arXiv.org, revised Apr 2013.
    2. Fabien Guilbaud & Huyên Pham, 2012. "Optimal High Frequency Trading in a Pro-Rata Microstructure with Predictive Information," Working Papers hal-00697125, HAL.
    3. Fabien Guilbaud & Huy\^en Pham, 2012. "Optimal High Frequency Trading in a Pro-Rata Microstructure with Predictive Information," Papers 1205.3051, arXiv.org.

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