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Order Dynamics in the Italian Treasury Security Wholesale Secondary Market

  • Coluzzi, Chiara
  • Ginebri, Sergio

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    MTS markets are an example of quote driven electronic order book markets for Government securities. Proposals are firm, immediately executable and aggregated in a limit order book. In this paper we analyse the evolution of the interaction between the order book and order flow by exploring the determinants of the flows of limit and market orders over three years. We are able to test several hypotheses coming from theoretical models. This is, to our knowledge, one of the first empirical test of these hypotheses based on Government bond data. We find that market and limit orders show positive autocorrelation and clustering as in Biais et al. (1995). No activity is clustered as well. This diagonal effect could also explain the positive impact of book depth near the quote on the flows of new limit orders. On the contrary, depth beyond the second best price seems to play no role in book dynamics. Furthermore, increasing competition, measured as an increase in the number of operators, has a negative effect on orders. In addition, we find mild support to the theoretical prediction of a positive effect of book depth on order aggressiveness. Best spread, instead, behaves consistently with theoretical models: a larger best spread encourages new limit orders inside-thequote.

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    File URL: http://web.unimol.it/progetti/repec/mol/ecsdps/ESDP08050.pdf
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    Paper provided by University of Molise, Dept. EGSeI in its series Economics & Statistics Discussion Papers with number esdp08050.

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    Length: 17 pages
    Date of creation: 25 Nov 2008
    Date of revision:
    Handle: RePEc:mol:ecsdps:esdp08050
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    1. Ingrid Lo & Stephen G. Sapp, 2007. "Order Aggressiveness and Quantity: How Are They Determined in a Limit Order Market?," Working Papers 07-23, Bank of Canada.
    2. Burton Hollifield & Robert A. Miller & Patrik Sand�s, 2004. "Empirical Analysis of Limit Order Markets," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1027-1063.
    3. Antonio Scalia & Valerio Vacca, 1999. "Does Market Transparency Matter? A Case Study," CGFS Papers chapters, in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-27 Bank for International Settlements.
    4. Ranaldo, Angelo, 2004. "Order aggressiveness in limit order book markets," Journal of Financial Markets, Elsevier, vol. 7(1), pages 53-74, January.
    5. Ellul, Andrew & Holden, Craig W. & Jain, Pankaj & Jennings, Robert, 2007. "Order dynamics: Recent evidence from the NYSE," Journal of Empirical Finance, Elsevier, vol. 14(5), pages 636-661, December.
    6. Michael J. Fleming & Bruce Mizrach, 2009. "The microstructure of a U.S. Treasury ECN: the BrokerTec platform," Staff Reports 381, Federal Reserve Bank of New York.
    7. 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.
    8. Charles Cao & Oliver Hansch & Xiaoxin Wang, 2008. "Order Placement Strategies In A Pure Limit Order Book Market," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 31(2), pages 113-140.
    9. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
    10. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
    11. Huang, Roger D. & Cai, Jun & Wang, Xiaozu, 2002. "Information-Based Trading in the Treasury Note Interdealer Broker Market," Journal of Financial Intermediation, Elsevier, vol. 11(3), pages 269-296, July.
    12. 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.
    13. Ronald L. Goettler & Christine A. Parlour & Uday Rajan, 2005. "Equilibrium in a Dynamic Limit Order Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2149-2192, October.
    14. Hee-Joon Ahn, 2001. "Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong," Journal of Finance, American Finance Association, vol. 56(2), pages 767-788, 04.
    15. Coluzzi, Chiara & Ginebri, Sergio & Turco, Manuel, 2008. "Measuring and Analyzing the Liquidity of the Italian Treasury Security Wholesale Secondary Market," Economics & Statistics Discussion Papers esdp08044, University of Molise, Dept. EGSeI.
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