Fast and slow cancellations and trader behavior |
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Authors: | Thomas H McInish Olena Nikolsko-Rzhevska Alex Nikolsko-Rzhevskyy Irina Panovska |
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Institution: | 1. Fogelman College of Business and Economics, University of Memphis, Memphis, Tennessee;2. Department of Finance, Lehigh University, Bethlehem, Pennsylvania;3. Department of Economics, Lehigh University, Bethlehem, Pennsylvania;4. Department of Economics, University of Texas at Dallas, Richardson, Texas |
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Abstract: | We investigate how short-lived liquidity supply due to order cancellations affects the order-placement behavior of slow traders. When order cancellations increase, slow traders submit fewer and less aggressive orders. Both short- and long-lived liquidity supply have positive effects on the market overall, reducing spreads and increasing depth. We conclude that it is not necessary to require limit orders to have a minimum lifespan. We develop econometric and machine-learning frameworks that allow traders to predict whether a quote is likely to have a short or long life, increasing the ability of slow traders to respond strategically to changing order flow. |
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Keywords: | order cancellations liquidity provision machine learning algorithmic trading |
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