Competition, Signaling and Non-Walking Through the Book: Effects on Order Choice

40 Pages Posted: 2 Aug 2012 Last revised: 4 May 2013

See all articles by Marcela Valenzuela

Marcela Valenzuela

Pontificia Universidad Católica de Chile

Ilknur Zer

Board of Governors of the Federal Reserve System

Date Written: March 2013

Abstract

We investigate the effects of competition and signaling in a pure order driven market and examine the trading patterns of agents when walking through the book is not allowed. Our results suggest that the variables capturing the cost of a large market order are not informative for an impatient trader under this market mechanism. We also document that the competition effect is not present only at the top of the book but persistent beyond the best quotes. Moreover, it dominates the signaling effect for both a limit order and a market order trader. Finally, we show that institutional investors' order submission strategies are characterized by only a few pieces of the limit order book information. This is consistent with informed traders placing orders based on their own private valuations rather than the state of the book.

Keywords: Limit Order Book, Order Aggressiveness, Order-Driven Markets, Walking through the Book, Competition, Signaling

Suggested Citation

Valenzuela, Marcela and Zer, Ilknur, Competition, Signaling and Non-Walking Through the Book: Effects on Order Choice (March 2013). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2122310 or http://dx.doi.org/10.2139/ssrn.2122310

Marcela Valenzuela (Contact Author)

Pontificia Universidad Católica de Chile ( email )

Vicuña Mackenna 4860
Santiago, R. Metropolitana 7520421
Chile

Ilknur Zer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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