Order aggressiveness, pre-trade transparency, and long memory in an order-driven market

Ryuichi Yamamoto ()

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 11, 1938-1963

Abstract: Recent empirical research has documented that the state of the limit order book influences stock investors' strategies. Investors place more aggressive orders when the same side of the order book is thicker, and less aggressive orders when it is thinner. We conjecture and demonstrate that this behavior is related to long memories of trading volume, volatility, and order signs in stock markets. We investigate our conjecture in two types of artificial stock markets: a transparent market, in which agents observe all limit orders on both sides of the book and order volumes at those prices before they trade; and a less transparent market, in which agents observe only the best five bid and ask quotes with the depth available at these limit prices. The first market structure resembles certain actual stock exchanges in the level of pre-trade transparency, such as the Australian Stock Exchange, NYSE OpenBook, and the London Stock Exchange, whereas the second market structure is consistent with stock exchanges such as Euronext Paris, the Toronto Stock Exchange, the Tokyo Stock Exchange, and Hong Kong Exchanges and Clearing. We demonstrate that our long memory results are robust with different levels of pre-trade transparency, implying that the strategy constructed by the state of the order book is key for explaining long memories in many actual stock exchanges.

Keywords: Long memory; Order aggressiveness; Pre-trade transparency; Market microstructure; Agent-based modeling (search for similar items in EconPapers)
JEL-codes: D44 G12 G14 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:11:p:1938-1963

DOI: 10.1016/j.jedc.2011.06.009

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