Order aggressiveness and order book dynamics

In this paper, we study the determinants of order aggressiveness and traders’ order submission strategy in an open limit order book market. Applying an order classification scheme, we model the most aggressive market orders, limit orders as well as cancellations on both sides of the market employing a six-dimensional autoregressive conditional intensity model. Using order book data from the Australian Stock Exchange, we find that market depth, the queued volume, the bid-ask spread, recent volatility, as well as recent changes in both the order flow and the price play an important role in explaining the determinants of order aggressiveness. Overall, our empirical results broadly confirm theoretical predictions on limit order book trading. However, we also find evidence for behavior that can be attributed to particular liquidity and volatility effects.

[1]  Ashish Tiwari,et al.  Quote Setting and Price Formation in an Order Driven Market , 1999 .

[2]  Brian F. Smith,et al.  The costs and determinants of order aggressiveness , 2000 .

[3]  David Veredas,et al.  What pieces of limit order book information are informative , 2004 .

[4]  N. Hautsch,et al.  Estimating the intensity of buy and sell arrivals in a limit order book market , 2003 .

[5]  Lawrence Kryzanowski,et al.  An Exploratory Analysis of the Order Book, and Order Flow and Execution on the Saudi Stock Market , 2000 .

[6]  P. Brémaud.  Point processes and queues, martingale dynamics , 1983 .

[7]  S. Sapp,et al.  Order Submission: The Choice between Limit and Market Orders , 2003 .

[8]  Robert F. Engle,et al.  The ACD Model: Predictability of the Time Between Concecutive Trades , 2000 .

[9]  Joachim Grammig,et al.  Non-monotonic hazard functions and the autoregressive conditional duration model , 2000 .

[10]  Luc Bauwens,et al.  Dynamic Latent Factor Models for Intensity Processes , 2004 .

[11]  Liquidity Supply and Demand in Limit Order Markets , 2002 .

[12]  Puneet Handa,et al.  Limit Order Trading , 1995 .

[13]  Jeffrey R. Russell.  Econometric Modeling of Multivariate Irregularly-Spaced High-Frequency Data , 2000 .

[14]  Thierry Foucault,et al.  Order flow composition and trading costs in a dynamic limit order market 1 I am grateful to Bruno Bi , 1999 .

[15]  Charles Cao,et al.  The Informational Content of an Open Limit Order Book , 2004 .

[16]  Clive G. Bowsher.  Modelling Security Market Events in Continuous Time: Intensity Based, Multivariate Point Process Models , 2003 .

[17]  Angelo Ranaldo,et al.  Order aggressiveness in limit order book markets , 2004 .

[18]  L. Bauwens,et al.  The stochastic conditional duration model: a latent variable model for the analysis of financial durations , 2004 .

[19]  Joachim Grammig,et al.  A family of autoregressive conditional duration models , 2006 .

[20]  L. Bauwens,et al.  The Logarithmic Acd Model: An Application to the Bid-Ask Quote Process of Three NYSE Stocks , 2000 .

[21]  Luc Bauwens,et al.  The Stochastic Conditional Duration Model: A Latent Factor Model for the Analysis of Financial Durations , 2004 .

[22]  Christine A. Parlour.  Price Dynamics in Limit Order Markets , 1998 .

[23]  Nikolaus Hautsch,et al.  A Continuous-Time Measurement of the Buy-Sell Pressure in a Limit Order Book Market , 2004 .

[24]  Jeffrey R. Russell,et al.  Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data , 1998 .

[25]  Asger Lunde,et al.  A Generalized Gamma Autoregressive Conditional Duration Model , 1999 .

[26]  Kalman J. Cohen,et al.  Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread , 1981, Journal of Political Economy.

[27]  L. Glosten.  Is the Electronic Open Limit Order Book Inevitable , 1994 .

[28]  Christophe Bisière,et al.  Timing of Orders, Order Aggressiveness and the Order Book at the Paris Bourse , 2000 .

[29]  Chester Spatt,et al.  An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse , 1995 .

[30]  Lawrence Harris,et al.  Market vs. Limit Orders: The SuperDOT Evidence on Order Submission Strategy , 1996, Journal of Financial and Quantitative Analysis.

[31]  Ruey S. Tsay,et al.  A nonlinear autoregressive conditional duration model with applications to financial transaction data , 2001 .

[32]  P. Brémaud.  Point Processes and Queues , 1981 .

[33]  Nikolaus Hautsch,et al.  Modelling Irregularly Spaced Financial Data: Theory and Practice of Dynamic Duration Models , 2004 .

[34]  Duane J. Seppi.  Liquidity Provision with Limit Orders and a Strategic Specialist , 1997 .

[35]  Lawrence Harris,et al.  Optimal Dynamic Order Submission Strategies In Some Stylized Trading Problems , 1998 .