Order types and natural price change: Model and empirical study of the Chinese market

Siyu Liu, Chaoyi Zhao and Lan Wu
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Siyu Liu: School of Mathematical Sciences, Peking University, Beijing, P. R. China
Chaoyi Zhao: School of Mathematical Sciences, Peking University, Beijing, P. R. China
Lan Wu: ��LMEQF, School of Mathematical Sciences, Peking University, Beijing, P. R. China

International Journal of Financial Engineering (IJFE), 2022, vol. 09, issue 04, 1-32

Abstract: Order type plays an important role in algorithmic trading and is a key factor of price impact. In this paper, we propose a new framework for studying the discrete price change process, which focuses on the impacts of aggressive orders (market orders and aggressive limit orders) and cancelations. The price change process is driven by states and events of best quotes, and we define the event-based price change as the “natural price change†(NPC). Under the framework, we propose a heteroscedastic linear econometric model for the NPC to explore the impact of different types of orders on the price dynamics. To verify the usability of our model and explore the driving factors of price dynamics, we conduct a thorough empirical analysis for 786 large-tick stocks traded on the Shenzhen Stock Exchange. Empirical results statistically demonstrate that aggressive orders can introduce stronger impact on the NPC than cancelations. Meanwhile, splitting a big order into several small orders can lead to a larger NPC. Our framework can also be applied for the prediction of price change.

Keywords: Market microstructure; high-frequency data; bid-ask spread; natural price change; order type (search for similar items in EconPapers)
JEL-codes: C51 C58 G12 G14 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S2424786322500335

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