Order Anticipation around Predictable Trades
62 Pages Posted: 26 Aug 2016 Last revised: 9 Oct 2018
Date Written: August 2018
I study the presence of order anticipation strategies by examining predictable patterns in large order trades. I construct three simple signals based on child-order execution patterns and find empirical evidence that stronger signals are correlated with higher execution costs. I use the SEC's ban on unfiltered access and increase in noise trading as shocks to order anticipatory activities of algorithmic traders and show that the price impact of predictability is smaller when order anticipation becomes difficult. The empirical findings are mostly consistent with the back-running theory which predicts delayed price impact as strategic traders learn about the large order gradually.
Keywords: Order Anticipation, Algorithmic Trading, Predatory Trading, Back-Running
JEL Classification: G12, G14
Suggested Citation: Suggested Citation