Limit order submission risks, order choice, and tick size

Ryuichi Yamamoto ()

Pacific-Basin Finance Journal, 2020, vol. 59, issue C

Abstract: We propose empirical measures of non-execution and picking-off risks and demonstrate that a minimum tick size reduction decreases non-execution risk but increases picking-off risk on the Tokyo Stock Exchange. This results in a higher tendency to submit aggressive orders for some stocks and cancel limit orders for the others. We conclude that our two limit order submission risks are crucial for understanding the results of past empirical studies that examine how minimum tick size reduction impacts limit order submission risks and why traders become aggressive in their order choice. We further show that our proposed measures of non-execution and picking-off risks are better variables than are proxies for the two risks such as spread (which have been suggested by previous empirical studies) or transaction cost measured by the relative tick size when analyzing the determination of the order choice and/or evaluating a minimum tick size reduction policy.

Keywords: Limit order submission risk; Order aggressiveness; Tick size; Market microstructure; Tokyo stock exchange (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:59:y:2020:i:c:s0927538x19302732

DOI: 10.1016/j.pacfin.2019.101261

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