Price Discovery Without Trading: Evidence from Limit Orders

51 Pages Posted: 5 Sep 2015 Last revised: 15 May 2018

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Ryan Riordan

Smith School of Business

Date Written: May 10, 2018

Abstract

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

Brogaard, Jonathan and Hendershott, Terrence J. and Riordan, Ryan, Price Discovery Without Trading: Evidence from Limit Orders (May 10, 2018). Finance Down Under 2017 Building on the Best from the Cellars of Finance. Available at SSRN: https://ssrn.com/abstract=2655927 or http://dx.doi.org/10.2139/ssrn.2655927

Jonathan Brogaard (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Ryan Riordan

Smith School of Business ( email )

Smith School of Business, Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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