46 Pages Posted: 8 Jun 2013 Last revised: 13 Aug 2014
Date Written: August 12, 2014
We document a two-fold increase in limit order cancellation activity over the last decade, and study the determinants of cancellations and the change in cancellation activity through time. We also examine the impact of order cancellation on market quality. We use an instrumental variable approach and estimate a simultaneous equations model to overcome simultaneity in the trading process. We find significant differences in cancellation activity in the post Reg NMS environment, and differences in cancellation activity between exchanges. However, we fail to find evidence that the increase in cancellations is detrimental to market quality, despite concerns from regulators and traders.
Keywords: Cancelled Orders, Cancellations, Limit Orders
JEL Classification: G12, G14
Suggested Citation: Suggested Citation