A comprehensive test of order choice theory: recent evidence from the NYSE

Andrew Ellul, Craig W. Holden, Pankaj Jain and Robert Jennings

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We perform a comprehensive test of order choice theory from a sample period when the NYSE trades in decimals and allows automatic executions. We analyze the decision to submit or cancel an order or to take no action. For submitted orders we distinguish order type (market vs. limit), order side (buy vs. sell), execution method (floor vs. automatic), and order pricing aggressiveness. We use a multinomial logit specification and a new statistical test. We find a negative autocorrelation in changes in order flow exists over five-minute intervals supporting dynamic limit order book theory, despite a positive first-order autocorrelation in order type. Orders routed to the NYSE’s floor are sensitive to market conditions (e.g., spread, depth, volume, volatility, market and individual-stock returns, and private information), but those using the automatic execution system (Direct+) are insensitive to market conditions. When the quoted depth is large, traders are more likely to “jump the queue” by submitting limit orders with limit prices bettering existing quotes. Aggressively-priced limit orders are more likely late in the trading day providing evidence in support of prior experimental results.

Keywords: order choice; limit order; market order; automatic execution; limit order book (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2003-11-10
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Citations: View citations in EconPapers (4)

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