Does the Option to Cancel an Order in a Double Auction Market Matter?

Abstract

The double auction trading environment has become one of the most experimentally-investigated trading environments. This paper seeks is to determine whether the ability of traders to cancel orders, before their potential execution, in a double auction framework, can affect price variables and the volume of orders and transactions. Not all researchers in the experimental markets literature allow that option. The vast majority of experimental markets researchers do not report whether they allowed that option or not. Because of the non-standardized use of the cancellation rule in the experimental-markets literature, presenting evidence on the possible effect of the cancellation option will be of interest to those conducting research in an experimental-market context.

Our results indicate that the option to cancel affects trading volume more than price-associated variables. We find that players use the option to cancel if the option is given to them. We also find that the number of submitted orders and the number of transactions is higher when we allow the players to cancel their orders. We present evidence that the obtained findings are not only due to budget constraints but also due to changes in the bidding behavior of the players. We do not find differences in the standard deviation of the limits of the standing submitted orders or in the price of the transactions.

Keywords: experimental markets, double auction, order cancellation

JEL Classification: C90, D40