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Why is order flow so persistent?

Author Info

Listed author(s):
  • Bence Toth
  • Imon Palit
  • Fabrizio Lillo
  • J. Doyne Farmer

Abstract

Order flow in equity markets is remarkably persistent in the sense that order signs (to buy or sell) are positively autocorrelated out to time lags of tens of thousands of orders, corresponding to many days. Two possible explanations are herding, corresponding to positive correlation in the behavior of different investors, or order splitting, corresponding to positive autocorrelation in the behavior of single investors. We investigate this using order flow data from the London Stock Exchange for which we have membership identifiers. By formulating models for herding and order splitting, as well as models for brokerage choice, we are able to overcome the distortion introduced by brokerage. On timescales of less than a few hours the persistence of order flow is overwhelmingly due to splitting rather than herding. We also study the properties of brokerage order flow and show that it is remarkably consistent both cross-sectionally and longitudinally.

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File URL: http://arxiv.org/pdf/1108.1632
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Paper provided by arXiv.org in its series Papers with number 1108.1632.

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Date of creation: Aug 2011
Date of revision: Nov 2014
Publication status: Published in Journal of Economic Dynamics and Control 51, 218-239 (2015)
Handle: RePEc:arx:papers:1108.1632
Contact details of provider: Web page: http://arxiv.org/

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Cited by:

  1. Aur\'elien Alfonsi & Pierre Blanc, 2014. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Papers 1404.0648, arXiv.org, revised Jun 2015.

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