The Determinants of Limit Order Cancellations

Abstract

Almost all limit orders are cancelled. We examine two economic channels that can motivate cancellations: reductions in the expected profit at execution, and reductions in the probability of execution. An order-level analysis shows that changes in depth at the best bid and offer prices, as well as changes in the order queue position, influence cancellation in a way consistent with the former channel, that market makers monitor the expected profit at execution of each limit order. Although buy-side investors use passive orders extensively, our findings indicate that limit order cancellations on aggregate are best understood through models of liquidity provision.

Keywords: limit order profits, queue position, liquidity supply, fleeting orders, HFT, time priority, market depth, market making

JEL Classification: G14, G15, G10