The Power of Patience: A Behavioral Regularity in Limit Order Placement

6 Pages Posted: 16 Aug 2002

See all articles by Ilija I. Zovko

Ilija I. Zovko

affiliation not provided to SSRN

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School; Santa Fe Institute

Date Written: May 1, 2002

Abstract

In this paper we demonstrate a striking regularity in the way people place limit orders in financial markets, using a data set consisting of roughly seven million orders from the London Stock Exchange. We define the relative limit price as the difference between the limit price and the best price available. Merging the data from 50 stocks, we demonstrate that for both buy and sell orders, the unconditional cumulative distribution of relative limit prices decays roughly as a power law with exponent approximately 1.5. This behavior spans more than two decades, ranging from a few ticks to about 2000 ticks. Time series of relative limit prices show interesting temporal structure, characterized by an autocorrelation function that asymptotically decays as C(T)=T ^(-0.4). Furthermore, relative limit price levels are positively correlated with and are led by price volatility. This feedback may potentially contribute to clustered volatility.

JEL Classification: C0, C15, G10

Suggested Citation

Zovko, Ilija I. and Farmer, J. Doyne, The Power of Patience: A Behavioral Regularity in Limit Order Placement (May 1, 2002). Available at SSRN: https://ssrn.com/abstract=316160 or http://dx.doi.org/10.2139/ssrn.316160

Ilija I. Zovko (Contact Author)

affiliation not provided to SSRN ( email )

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

HOME PAGE: http://www.inet.ox.ac.uk/people/view/4

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States
505-984-8800 (Phone)
505-982-0565 (Fax)

HOME PAGE: http://www.santafe.edu/~jdf/

Register to save articles to
your library

Register

Paper statistics

Downloads
306
Abstract Views
1,549
rank
101,085
PlumX Metrics