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http://ssrn.com/abstract=310940
 
 

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Limit Orders and Volatility in a Hybrid Market: The Island ECN


Joel Hasbrouck


New York University (NYU) - Department of Finance

Gideon Saar


Cornell University - Samuel Curtis Johnson Graduate School of Management

July 19, 2002

Stern School of Business Dept. of Finance Working Paper FIN-01-025

Abstract:     
This paper presents a cross-sectional empirical investigation of the relations between volatility and various measures of activity on the Island ECN, an Alternative Trading System for US equities that is organized as an electronic limit order book. We find that higher volatility is generally associated with (i) a lower proportion of limit orders in the incoming order flow, (ii) a higher probability of limit order execution, and (iii) shorter expected time to execution. We find weaker evidence that higher volatility is associated with lower depth in the book. In addition, we find that Island's market share for a given firm is positively related to the overall level of Nasdaq trading in the firm, and document substantial use of hidden limit orders (for which the submitter has opted to forgo display of the order). Finally, over one quarter of the limit orders submitted to Island are canceled (unexecuted) within two seconds or less. The extensive use of these 'fleeting' orders is at odds with the view that limit order traders (like dealers) are patient providers of liquidity.

Number of Pages in PDF File: 50

Keywords: Island ECN, electronic communications networks, alternative trading systems, limit order book, volatility, limit orders, market microstructure, hidden orders, fleeting orders

JEL Classification: G20, G10, D40, L80, O33

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Date posted: July 26, 2002  

Suggested Citation

Hasbrouck, Joel and Saar, Gideon, Limit Orders and Volatility in a Hybrid Market: The Island ECN (July 19, 2002). Stern School of Business Dept. of Finance Working Paper FIN-01-025. Available at SSRN: http://ssrn.com/abstract=310940 or http://dx.doi.org/10.2139/ssrn.310940

Contact Information

Joel Hasbrouck
New York University (NYU) - Department of Finance ( email )
44 West 4th Street
MEC Suite 9-190, Mail Code 0268
New York, NY 10012-1126
United States
212-998-0310 (Phone)
212-995-4233 (Fax)
Gideon Saar (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
455 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Saar/
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