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Order aggressiveness and quantity: How are they determined in a limit order market?

  • Lo, Ingrid
  • Sapp, Stephen G.
Registered author(s):

    Dealers trading in a limit order market must choose both the order aggressiveness and the quantity for their orders. Since little research has considered how dealers make this trade-off, we empirically investigate how dealers jointly make these decisions in the foreign exchange market using a unique simultaneous equations model. Our model uses an ordered probit model to account for the discrete nature of order aggressiveness and a censored regression model to capture the quantity decision recognizing the clustering of orders at the smallest available quantity, $1 million. Using two currency pairs with very different trading characteristics, we find evidence of a trade-off between order aggressiveness and quantity. We also find a significant role being played by factors related to the levels of information asymmetry and liquidity in the dealers' choices of both the order aggressiveness and quantity.

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    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 20 (2010)
    Issue (Month): 3 (July)
    Pages: 213-237

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    Handle: RePEc:eee:intfin:v:20:y:2010:i:3:p:213-237
    Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

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