Depths and Spreads in Futures Markets: Relationship with Order Execution, Submission and Cancellation
22 Pages Posted: 15 Mar 2019
Date Written: January 13, 2019
This paper examines the relationship between limit order submissions and liquidity. We find that there is a negative relationship between the limit order arrival rate and depth at the best quotes (limit order queue length) and a positive relationship between submissions and bid-ask spreads. This is consistent with queuing theory predicting that an increase in the limit order arrival rate increases the queue length and therefore the time to execution of a limit order. Consequently, liquidity providers cover the increase in costs and risks associated with the increase in the time to execution of limit orders by increasing bid-ask spread.
Note: This research was funded under Corporations regulation 7.5.88 through the use of excess funds from the SFEFF.
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