Limit Order Placement by High-Frequency Traders
Borsa Istanbul Review, Forthcoming
67 Pages Posted: 10 Nov 2015 Last revised: 22 Dec 2016
Date Written: March 20, 2016
The effectiveness of liquidity provision by HFT firms via the limit order book is an unexplored but central policy issue. Using a unique dataset consisting of limit order placement, execution, and cancellations on Nasdaq, we find that HFT firms do not cancel orders more frequently than non-HFT firms. HFT firms more effectively use order cancellation to strategically manage their limit orders in anticipation of short-term price movements than non-HFT firms. HFT firms increase their liquidity provision during periods of high volatility; their liquidity provision is less affected by order imbalance shocks than that of non-HFT firms. Overall, our results indicate that HFT limit orders exert a stabilizing influence on markets.
Keywords: High Frequency Trading; Limit Order Book; Market Quality
JEL Classification: G14
Suggested Citation: Suggested Citation