Technology and liquidity provision: The blurring of traditional definitions

Abstract

The usual economic perspective on a limit order emphasizes its role in supplying liquidity. We investigate the trading of 300 Nasdaq-listed stocks on the Island ECN, an electronic communication network organized as a limit order book. We find that a substantial portion of the limit orders are cancelled within an extremely brief time. We term "fleeting orders" those limit order that are cancelled within two seconds of submission, and explore the role they play in trading strategies. Our principal finding is that fleeting limit orders are closer substitutes for market orders than for traditional limit orders. Our results suggest that the aim of a trader who submits a fleeting order is to demand immediacy. This contrasts with the traditional view of limit order traders as patient providers of liquidity. We hypothesize that a "new equilibrium" has arisen, driven by improved technology, the emergence of an active trading culture, and increased market fragmentation. The new environment transforms the market from one in which prices are posted (visible limit orders) into one where searches (for hidden liquidity) are needed in order to achieve better terms of trade.

High-Frequency Technical Trading: The Importance of Speed

“…While about 15% of all message activity is fleeting within 10 ms, this is already at least 30% within 100 ms, increasing further to 55% after 1 second. This is much higher than the 11.5% reported by Hasbrouck and Saar (2009) ble. The percentage of fleeting orders that actually improves the best bid or ask is also close to zero.…”

“…For example, Hasbrouck and Saar (2009) introduce the notion of fleeting orders, which are nonmarketable limit orders that are cancelled within a short time interval after having been submitted to the exchange. Hasbrouck and Saar (2009) document that, for a sample of 100 NASDAQ listed stocks traded on INET during October 2004, 36.69% (11.5%) of the limit orders are fleeting and get cancelled within 2 seconds (100 milliseconds).…”

Whose trades convey information? Evidence from a cross-section of traders

“…This is important since traders naturally differ in their size and sophistica-6 SELT was in fact developed in cooperation with REUTERS. 7 Payne (2003) and Hasbrouck and Saar (2004) also treat marketable limit orders as market orders.…”

Pre-trade transparency and informed trading: Experimental evidence on undisclosed orders

“…The …gure reveals that 17.8% to 19.5% of the executed volume in the experimental asset markets is undisclosed, which is similar to the evidence documented in empirical studies (e.g., Frey and Sandas, 2008;Yao, 2013). While the ex ante probability of execution is lower for undisclosed orders, it seems that undisclosed orders are submitted aggressively to the LOB and more so under symmetric information (Frey and Sandas, 2008;Hasbrouck and Saar, 2009). …”