Duplicated Orders, Swift Cancellations, and Fast Market Making in Fragmented Markets
50 Pages Posted: 10 Apr 2019 Last revised: 27 Oct 2022
Date Written: January 21, 2022
Employing unique data from 91 stocks trading on their primary exchanges and three alternative venues, we show that limit orders are duplicated across competing venues as a result of cross-venue market-making strategies, leading to swift cancellation of duplicate orders after one of them is filled. This Duplicated-then-Canceled Liquidity, which accounts for a sizeable fraction of order cancellations, is predominantly used by high-frequency traders to build inventories. It is reduced by the use of smart order routing by aggressive traders. Its adverse impact on execution costs is small and these negative effects fail to outweigh the liquidity benefits of market fragmentation.
Keywords: high frequency trading (HFT), algorithmic trading (AT), fragmentation, limit order duplication, order cancellation
JEL Classification: G14, G15, G18
Suggested Citation: Suggested Citation