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

Evolving Dynamic Trade Execution Strategies Using Grammatical Evolution

“…Hall and Hautsch [10] observe an increase of all kinds of order submission during periods of high volatility. Ranaldo [18] supports an inverse relation between order aggression and volatility, while Lo and Sapp [14] report a positive relationship between order aggression and volatility. Cao et al [3] find that volatility has a minimal effect on order aggression.…”

Order Aggressiveness on the ASX Market

“…For limit orders, both the execution risk and adverse selection risk increases with the ordered quantity, since that a large-sized order may not be executed entirely and a large loss may occur when the value of underling stock changes. Lo and Sapp (2007) provide an empirical study of the joint nature of order price and quantity in the limit order market and they find a significantly negative relationship between price aggressiveness and order size through explicitly examining the trade-offs between these two dimensions, conditioning on the state of the limit order book. They offer two explanations why more aggressive orders are smaller: order splitting or order consolidating (Lo and Sapp, 2007, p.14).…”

“…First, traders may strategically split large orders to reduce price impact. Lo and Sapp (2007) test the autocorrelation of market orders and aggressive limit orders, and their findings suggest that dealers split their orders to either hide their information or to decrease the execution costs. Second, if certain market participants can observe the orders of others whom they believe to be informed, then they may imitate their orders.…”

“…The empirical analysis of price aggressiveness is conducted using an Ordered Probit model, a method introduced in the market microstructure literature by Hausman et al (1992) to study the nature of discrete price changes, and widely employed by empirical investigations such as Ranaldo (2004) and Lo and Sapp (2007). The Ordered Probit model fits the price aggressiveness equation well because the different actions available to traders are inherently ordered in terms of their aggressiveness.…”

“…One critical part of study on the limit order trading process is how the trader makes the decision to trade. Following the paper of Lo and Sapp (2007), traders are assumed to confront with a simultaneous choice on both price aggressiveness and quantity. Price aggressiveness is defined by the execution priority: markets orders, those to buy or sell a pre-specified quantity at the best available price and thus being executed immediately, is regarded as the most aggressive orders.…”