Price Discovery Without Trading: Evidence from Limit Orders
51 Pages Posted: 5 Sep 2015 Last revised: 19 Jun 2020
Date Written: May 10, 2018
We analyze the contribution to price discovery of market and limit orders by high frequency traders (HFTs) and non-HFTs. While market orders have a larger individual price impact, limit orders are far more numerous. This results in price discovery occurring predominantly through limit orders. HFTs submit the bulk of limit orders and these limit orders provide most of the price discovery. Submissions of limit orders and their contribution to price discovery fall with volatility due to changes in HFTs behavior. Consistent with adverse selection arising from faster reactions to public information, HFTs' informational advantage is partially explained by public information.
Keywords: High-Frequency Trading, Price Discovery, Limit Order Book, Fragmentation
JEL Classification: D40, G14, G20
Suggested Citation: Suggested Citation