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Limit Order Placement by High-Frequency Traders

Borsa Istanbul Review, Forthcoming

67 Pages Posted: 10 Nov 2015 Last revised: 22 Dec 2016

See all articles by Avanidhar Subrahmanyam

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Financial Research Network (FIRN)

Hui Zheng

Discipline of Finance, The University of Sydney; Capital Markets CRC Limited

Date Written: March 20, 2016

Abstract

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

Subrahmanyam, Avanidhar and Zheng, Hui, Limit Order Placement by High-Frequency Traders (March 20, 2016). Borsa Istanbul Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2688418 or http://dx.doi.org/10.2139/ssrn.2688418

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Hui Zheng (Contact Author)

Discipline of Finance, The University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 3915 (Phone)
+61 2 9351 6461 (Fax)

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

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