Price Impact of Order Revisions: Evidence from Order Spoofing

Abstract

We investigate the price impact of the well-known but empirically unsettled order spoofing strategy. We use a comprehensive database that includes complete orders of index futures and options submitted by every market participant and a unique linkage of order execution to overcome the empirical hurdles of detecting order flows and order executions. The results show that the upcoming transaction price increases (decreases) after revisions of aggressive limit sell (buy) orders. The opposite-side limit orders are executed at better prices immediately after revisions of aggressive limit orders, which is consistent with the spoofing tactic. We also use the Dynamic Price Banding Mechanism as a quasi-natural experiment to address a potential endogeneity issue. Overall, we find that the price impact is more pronounced during daily open and close intervals, and periods with large order revisions, wide bid-ask spreads, and shallow quote depths. This effect is also more pronounced for out-of-themoney options.

Keywords: Price Impact, Price discovery, Order Revision, Spoofing

JEL Classification: G14