The Impact of Strategic Order Activity During Trading Halts

Abstract:     
This study investigates the impact of strategic order activities during the pre-opening session of trading halts on post-halt return and volatility. Strategic orders are non-binding, aggressive limit orders that are placed in the pre-opening phase but subsequently cancelled or revised shortly before the market re-opens. We develop a model which shows that in the presence of strategic orders, price reverts as informed traders deliberately inflate or deflate the price and flip when the halt is lifted. The model further shows that strategic order activity increases with the level of information asymmetry and liquidity. Additionally, our model shows that the level of post-halt volatility is higher when strategic order is present. Our theoretical conjecture is empirically tested and results broadly confirm with the model prediction. We argue that strategic order activities help explaining the positive linkage between news uncertainty and post-halt volatility, which is documented by extant studies on trading halt. Our findings provide important implications for regulators. The classification of the strategic limit orders scheme used in this study could assist policy makers or market surveillance bodies in identifying potential order book manipulation.

Number of Pages in PDF File: 58

Keywords: strategic order submission, order cancellation, trading halt, price discovery, order book manipulation

JEL Classification: G10, G11, G12, G14

working papers series