CANCELING LIQUIDITY

Bonnie F. Van Ness, Robert A. Van Ness and Ethan D. Watson

Journal of Financial Research, 2015, vol. 38, issue 1, 3-33

Abstract: type="main" xml:lang="en">

We document an increase in limit order cancellation activity over the last decade and examine the impact of cancellation activity on market quality. Additionally, we test theoretical models pertaining to cancellation activity and study the differences in cancellation activity among the three largest exchanges. We find cancellation activity is detrimental to market quality. As predicted by theory, we find that cancellation activity increases with increases in the frequency with which traders contact the market and with increases in the uncertainty of the arrival rate of impatient traders. Finally, we document significant differences in cancellation activity between exchanges.

Date: 2015
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