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Order Aggressiveness and Quantity: How Are They Determined in a Limit Order Market?

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  • Ingrid Lo
  • Stephen Sapp

Abstract

Dealers trading in a limit order market must choose both the order aggressiveness and the quantity for their orders. We empirically investigate how dealers jointly make these decisions in the foreign exchange market using a unique simultaneous equations model. The model uses an ordered probit model to account for the discrete nature of order aggressiveness and a censored regression model to capture the clustering of orders placed at the smallest available quantity, $1 million. We find evidence of a clear trade-off between order aggressiveness and quantity: more aggressive orders tend to be smaller in size. The increased competition (demand) suggested by increased depth on the same (opposite) side of the market leads to less (more) aggressive orders in smaller (larger) size. This holds for the depths at both the best and off-best prices, even though off-best depths are not observable to dealers.

Suggested Citation

  • Ingrid Lo & Stephen Sapp, 2007. "Order Aggressiveness and Quantity: How Are They Determined in a Limit Order Market?," Staff Working Papers 07-23, Bank of Canada.
  • Handle: RePEc:bca:bocawp:07-23
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    More about this item

    Keywords

    Exchange rates; Financial markets;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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