Limit Orders, Trading Activity, and Transactions Costs in Equity Futures in an Electronic Trading Environment

Yıl 2010, Cilt: 2 Sayı: 1, 11 - 35, 01.04.2010

Lorne N. Switzer Haibo Fan

Öz

The behaviour of limit order quotes and trading activity are studied using a unique and rich database that includes the identity of market participants from a fully automated derivatives market. The analysis is performed using transactions records for three aggregated trader types and three trade identifiers, with trades stamped in milliseconds for the SXF, the equity futures contract of the Montreal Exchange. The identifiers distinguish trades between principals; agency based trades, as well as transactions that are conducted for risk management as opposed to speculative purposes. Agency related trades are shown to represent the largest amount of trading activity relative to other account types. Over 90% of trades in this electronic market are limit orders. The limit order book, especially the depth 1 order, has a dominant role in providing liquidity and in explaining market participants trading behaviour. Participants in the SXF reference their trades to the best limit order depth. Hence, investors with large positions or investors who want to build a large position have to strategically split large orders to close/build their position, according to the depth of the best limit order, to ameliorate price impact and information leakage effects. In addition, the results show that traditionally measured spreads have no relationship with trading costs.

Anahtar Kelimeler

Limit Orders, Trading Activity, Transactions Costs, Electronic Trading

Kaynakça

• Ahn, H., C. Cao and H. Choe (1998). Decimalization and competition among stock markets: Evidence from the Toronto stock exchange cross-listed securities. Journal of Financial Markets, 1, 51-87.
• Ahn, H., K. Bae and K. Chan (2001). Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong. Journal of Finance, 56, 767-788.
• Bacidore, J. (1997). The impact of decimalization on market quality: An empirical investigation of the Toronto stock exchange. Journal of Financial Intermediation, 6, 92- 120.
• Baesel, J.B., G. Shows, and E. Thorp (1983). The Cost of Liquidity Services in Listed Options: A Note. Journal of Finance, 38, 989-995.
• Beebower, G. and W. Priest (1980). The Tricks of the Trade: How Much Does Trading Really Cost? Journal of Portfolio Management, 6, 36-42.
• Biais, B., P. Hillion and C. Spatt (1995). An empirical analysis of the limit order book and the order flow in the Paris Bourse. Journal of Finance, 50, 1655-1689.
• Bortoli, L., A. Frino, E. Jarnecic and D. Johnstone (2006). Limit Order Book Transparency, Execution Risk, and Market Liquidity: Evidence from the Sydney Futures Exchange. Journal of Futures Markets, 26, 1147-1167
• Chan, Yue-cheong (2005). Price Movement Effects on the State of the Electronic Limit-Order Book. Financial Review, 40, 195-221
• Chang, E.C., P.R. Locke and S.C. Mann (1994). The Effect pf CME Rule 552 on Dual Traders. Journal of Futures Markets, 14, 493-510.
• Chang, E.C. and P. Locke (1996). The Performance and Market Impact of Dual Trading: CME Rule 552. Journal of Financial Intermediation, 5, 23-48.
• Chordia, T., R. Roll and A. Subrahmanyam (2001). Market liquidity and trading activity. Journal of Finance, 49, 255-267.
• Chung, H., F. Bonnie, V. Ness and T. Robert (1999). Limit orders and the bid-ask spread. Journal of Financial Economics, 53, 255-287.
• Coppejans, M., I. Domowitz and A. Madhavan (2003). Resiliency in an automated auction. Unpublished working paper, Barclays Global Investors, ITG Inc.
• Degryse, H., F. Jong, M. Ravenswaaij and G. Wuyts (2005). Aggressive Orders and the Resiliency of a Limit Order Market. Review of Finance, 9, 201-242.
• Demsetz, H. (1968). The Cost of Transacting. Quarterly Journal of Economics, 82, 33-53.
• Epps, T. (1976). The Demand for Brokerage Services: The Relation between Security Trading Volume and Transaction Cost. The Bell Journal of Economics, Spring 1976.
• Ferguson, M. and S. Mann (2001). Execution costs and their intraday variation in futures markets. Journal of Business, 74, 125-160.
• Fishman, M.J. and F.A. Longstaff (1992). Dual Trading in Futures Markets. Journal of Finance, 47, 643-671.
• Foucault, Thierry (1999). Order flow composition and trading costs in a dynamic limit order market. Journal of Financial Markets, 2, 193-226.
• Foucault, T., O. Kadan and E. Kandel (2005). Limit order book as a market for liquidity. Review of Financial Studies, 18, 1171-1217.
• George, J. and F.A. Longstaff (1993). Bid–Ask Spreads and Trading Activity in the S&P 100 Index Options Market. Journal of Financial and Quantitative Analysis, 381-397.
• Gilbert, C. and H. Rijken (2006). How is Futures Trading Affected by the Move to a Computerized Trading System? Lessons from the LIFFE FTSE 100 Contract. Journal of Business Finance and Accounting, 33, 1267-1297.
• Glosten, Lawrence R. (1994). Is the electronic open limit order book inevitable? Journal of Finance, 49, 1127-1161.
• Goettler, R., C. Parlour and U. Rajan (2005). Equilibrium in a Dynamic Limit Order Market. Journal of Finance, 60, 2149-2192.
• Goldstein, M. and K. Kavajecz (2000). Eights, sixteenths, and market depth: Changes in tick size on liquidity provision on the NYSE. Journal of Financial Economics, 56, 125-149.
• Gomber, P., U. Schweickert and E. Theissen (2004). Zooming in on liquidity. Unpublished working paper, University of Bonn.
• Griffiths, M., B. Smith, D. Turnbull and R. White (1998). The tole of tick size in upstairs trading and downstairs trading. Journal of Financial Intermediation, 7, 393-417.
• Griffiths, M., B. Smith, D. Turnbull and R. White (2000). The costs and determinants of order aggressiveness. Journal of Financial Economics, 56, 65-88.
• Haller, A. and H. Stoll (1989). Market Structure and Transaction Costs: Implied Spreads in the German Stock Market. Journal of Banking and Finance, 13, 697-708
• Handa, P. and R. Schwartz (1996). Limit order trading. Journal of Finance, 51, 1835-1861.
• Handa, P., R. Schwartz and A. Tiwari (2003). Quote setting and price formation in an order driven market. Journal of Financial Markets, 6, 461-489.
• Harris, L. and J. Hasbrouck (1996). Market vs. limit orders: The SuperDOT evidence on order submission strategy. Journal of Financial and Quantitative Analysis, 31, 213-232.
• Hedvall, K. and J. Niemeyer (1997). Order flow dynamics: Evidence from the Helsinki stock exchange. Unpublished working paper, Swedish School of Economics and Business Administration.
• Hollifield, B., R. Miller and P. Sandås (2004). Empirical Analysis of Limit Order Markets. Review of Economic Studies, 71, 1027-1063.
• Hollifield, B., R. Miller, P. Sandas and J. Slive (2003). Liquidity supply and demand: Empirical evidence from the Vancouver stock exchange. Unpublished working paper GSIA, Carnegie Mellon University.
• Kurov, A. (2005). Execution Quality in Open-Outcry Future Markets. Journal of Futures Markets, 25 1067-1092.
• Kurov, A. and T. Zabotina (2005). Is It Time to Reduce the Minimum Tick Sizes of the E- Mini Futures? Journal of Futures Markets, 25, 79-104.
• Locke, P. and P. Sarajoyi (2004). Interdealer Trading in Futures Market. Journal of Futures Markets, 24, 923-944.
• Locke P. and A. Sarkar (2001). Liquidity Supply and Volatility: Futures Market Evidence. Journal of Futures Markets, 21, 1-17.
• Locke, P. and P. Venkatesh (1997). Futures Market Transactions Costs. Journal of Futures Markets, 17, 229-45.
• Madhavan, A., D. Porter and D. Weaver (2005). Should securities markets be transparent? Journal of Financial Markets, 8, 265–287.
• Manaster, S. and S. Mann (1996). Life in the Pits: Competitive Market Making and Inventory Control. Review of Financial Studies, 9, 953-75.
• Martell, M. and A. Wolf (1987). Determinants of Trading Volumes in Futures Markets. Journal of Futures Markets, 3, 233-244.
• McInish, T. and R. Wood (1992). An analysis of intraday patterns in bid/ask spreads for NYSE stocks. Journal of Finance, 47, 753-764.
• Ross, D., E. Shapiro and A. Smith (1996). Price improvement of SuperDot market orders on the NYSE. Working Paper No. 96-02, New York Stock Exchange.
• Stoll, H.R. (1989). Inferring the Components of the Bid/Ask Spread: Theory and Empirical Tests. Journal of Finance, 44, 115-134.
• Switzer, Lorne and Haibo Fan (2007). The Transactions Costs of Risk Management vs. Speculation in an Electronic Trading Environment: Evidence from the Montreal Exchange. Journal of Trading, 2, 82-100.
• Van Achter, M. (2009). A Dynamic Limit Order Market with Diversity in Trading Horizons. Working Paper. http://ssrn.com/abstract=967610 (accessed April 22, 2010).
• Wang, G., R. Michalski, J. Jordan and E. Moriarty (1994). An intraday analysis of bid-ask spreads and price volatility in the S&P 500 index futures market. Journal of Futures Markets, 12, 621-634.
• Wang, H., J. Yau and T. Baptiste (1997). Trading Volume and Transaction Costs in Futures Markets. Journal of Futures Markets, 17, 757-780.