Limit Order Flow, Market Impact and Optimal Order Sizes: Evidence from NASDAQ TotalView-ITCH Data

29 Pages Posted: 22 Aug 2011

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS); Vienna Graduate School of Finance (VGSF)

Ruihong Huang

Humboldt University of Berlin

Date Written: August 22, 2011

Abstract

In this paper, we provide new empirical evidence on order submission activity and price impacts of limit orders at NASDAQ. Employing NASDAQ TotalView-ITCH data, we find that market participants dominantly submit limit orders with sizes equal to a round lot. Most limit orders are canceled almost immediately after submission if not getting executed. Moreover, only very few market orders walk through the book, i.e., directly move the best ask or bid quote. Estimates of impulse-response functions on the basis of a cointegrated VAR model for quotes and market depth allow us to quantify the market impact of incoming limit orders. We propose a method to predict the optimal size of a limit order conditional on its position in the book and a given fixed level of expected market impact.

Keywords: price impact, limit order, impulse response function, cointegration, optimal order size

JEL Classification: G14, C32, G17

Suggested Citation

Hautsch, Nikolaus and Huang, Ruihong, Limit Order Flow, Market Impact and Optimal Order Sizes: Evidence from NASDAQ TotalView-ITCH Data (August 22, 2011). Available at SSRN: https://ssrn.com/abstract=1914293 or http://dx.doi.org/10.2139/ssrn.1914293

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Ruihong Huang (Contact Author)

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

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