Order aggressiveness as a metric to assess the usefulness of accounting information

Motivated by the availability of high-frequency data on trading activity, this paper proposes the use of order aggressiveness as a metric to evaluate the usefulness of accounting information. I test, through an analysis of order aggressiveness, whether earnings announcements of firms listed on the Italian Stock Exchange limit order book have information content. I estimate an ordered probit relating order aggressiveness to unexpected earnings and to three market determinants of aggressiveness. Consistent with the theory on the choice between limit and market orders, I find that order aggressiveness increases with the absolute value of unexpected earnings. The results provide evidence on the extent to which the information contained in earnings is used by traders.     

DYNAMIC ORDER SUBMISSION AND HERDING BEHAVIOR IN ELECTRONIC TRADING

I analyze the dynamic trading behavior of market participants by developing a bivariate modeling framework for describing the arrival process of buy and sell orders in a limit order book. The model contains an extended autoregressive conditional duration model with a flexible generalized Beta distribution to explain the duration process, combined with a dynamic logit model to capture the traders' order submission strategy. I find that the state of the order book as well as the speed of the order arrival have a significant influence on the order placement, inducing temporal asymmetric market movements.     

Modelling the buy and sell intensity in a limit order book market

In this paper, we model the buy and sell arrival process in the limit order book market at the Australian Stock Exchange. Using a bivariate autoregressive intensity model we analyze the contemporaneous buy and sell intensity as a function of the state of the market. We find evidence that trading decisions are both information as well as liquidity driven. Confirming predictions from market microstructure theory traders submit market orders by inferring from the recent order flow and the book with respect to upper and lower tail expectations as well as trading directions. However, traders also tend to take liquidity when the liquidity supply is high. Moreover, we find evidence that traders pay more attention to recent order arrivals and the current state of the order book than to the past order flow.     

The submission of limit orders or market orders: The role of timing and information in the Reuters D2000-2 system

Recent work in the market microstructure literature suggests that the speed with which orders arrive in the market impacts traders' order submission decisions. In this study we use an asymmetric autoregressive conditional duration (ACD) model to empirically investigate the influence on the submission of limit and market orders of changes in the time between the past submissions of different types of orders, changes in the slope of the limit order book, and changes in price uncertainty. We find that the expected time between the arrivals of successive orders in the foreign exchange market depends on the previous type of order submitted and the slope on both sides of the order book. Price uncertainty (volatility) plays a secondary role after accounting for the impact of changes in the slope of the order book. Lastly, we find that there are fundamental changes in the level of information contained in the submission of orders at the opening and closing of markets.     

Limit order books and trade informativeness

In the microstructure literature, information asymmetry is an important determinant of market liquidity. The classic setting is that uninformed dedicated liquidity suppliers charge price concessions when incoming market orders are likely to be informationally motivated. In limit order book (LOB) markets, however, this relationship is less clear, as market participants can switch roles, and freely choose to immediately demand or patiently supply liquidity by submitting either market or limit orders. We study the importance of information asymmetry in LOBs based on a recent sample of 30 German Deutscher Aktienindex (DAX) stocks. We find that Hasbrouck's (1991) measure of trade informativeness Granger causes book liquidity, in particular that required to fill large market orders. Picking-off risk due to public news-induced volatility is more important for top-of-the book liquidity supply. In our multivariate analysis, we control for volatility, trading volume, trading intensity and order imbalance to isolate the effect of trade informativeness on book liquidity.     

Hidden Liquidity: Some New Light on Dark Trading

Using a laboratory market, we investigate how the ability to hide orders affects traders’ strategies and market outcomes in a limit order book environment. We find that order strategies are greatly affected by allowing hidden liquidity, with traders substituting nondisplayed for displayed shares and changing the aggressiveness of their trading. As traders adapt their behavior to the different opacity regimes, however, most aggregate market outcomes (such as liquidity and informational efficiency) are not affected as much. We also find that opacity appears to increase the profits of informed traders but only when their private information is very valuable.     

The strategic specialist and imperfect competition in a limit order market

The empirical literature suggests that the limit order book contains information that might be used by the specialist to his own advantage. I develop a model where there is a strategic specialist who competes against a limit order book and has information about supply. The presence of a strategic specialist in an imperfectly competitive limit order book market induces non-monotonicity of market indicators with respect to the variance of liquidation value. Moreover, the existence of private information about supply significantly affects market performance as it induces, among other effects, lower market liquidity. Finally, this model suggests another link between Kyle’s (1985, 1989) [Kyle, A., 1985. Continuous auctions and insider trading. Econometrica 53, 1315–1336, Kyle, A., 1989. Informed speculators with imperfect competition. Review of Economic Studies 56, 317–356] and Glosten and Milgrom’s (1985) [Glosten, L., Milgrom, P., 1985. Bid, ask and transaction prices in a specialist market with heterogeneously informed markets. Journal of Financial Economics 14, 71–100] models by allowing for strategic behaviour of the specialist.     

Liquidity determination in an order-driven market

We exploit full order level information from an electronic FX broking system to provide a comprehensive account of the determination of its liquidity. We not only look at bid-ask spreads and trading volumes, but also study the determination of order entry rates and depth measures derived from the entire limit order book. We find strong predictability in the arrival of liquidity supply/demand events. Further, in times of low (high) liquidity, liquidity supply (demand) events are more common. In times of high trading activity and volatility, the ratio of limit to market order arrivals is high but order book spreads and depth deteriorate. These results are consistent with market order traders having better information than limit order traders.     

More on a statistical analysis of log-periodic precursors to financial crashes

In this paper, we extend the existing empirical evidence on the relationship between the state of the limit order book (LOB) and order choice. Our contribution is twofold: first, we propose a sequential ordered probit (SOP) model which allows studying patient and impatient traders’ choices separately; second, we consider two pieces of LOB information, the best quotes and the book beyond the best quotes. We find that both pieces of LOB information explain the degree of patience of an incoming trader and, afterwards, its order choice. Nonetheless, the best quotes concentrate most of the explanatory power of the LOB. The shape of the book beyond the best quotes is crucial in explaining the aggressiveness of patient (limit order) traders, while impatient (market order) traders base their decisions primarily on the best quotes. Patient traders’ choices depend more on the state of the LOB on the same side of the market, while impatient traders mostly look at the state of the LOB on the opposite side. The aggressiveness of both types of traders augments with the inside spread. However, patient (impatient) traders submit more (less) aggressive limit (market) orders when the depth of the own (opposite) best quote and the length of the own (opposite) side of the book increase. We also find that higher depth away from the best ask (bid) quote may signal that this quote is ‘too low (high)’, causing incoming impatient buyers (sellers) to be more aggressive and incoming patient sellers (buyers) to be more conservative.     

Liquidity,information, strategic trading in an electronic order book: New insights from the European carbon markets

The electronic limit order book (LOB hereafter) has rapidly become the primary way of trading European carbon assets over the 4 years of the EU ETS programme (2008–2012). In this first attempt of examining the informational content of an electronic order book, we evidence that order flow imbalances have a moderate capacity to predict short term price changes. However, we find that both LOB slope and immediacy costs help to forecast quote improvements and volatility in the next 30 min. Further, we explain why informed trading is highly influential and show that it consists in mixing order splitting strategies and posting fleeting orders once the asymmetric information is reduced (Rosu, 2009). Overall, the consolidated status of the order book mirrors a high level of market uncertainty and a low degree of informational efficiency. In this way, strategic trading can in itself explain some of order book properties, independently of the degree of traders’ sophistication and market competition.     

Microstructure-based manipulation: Strategic behavior and performance of spoofing traders

We examine how investors strategically spoof the stock market by placing orders with little chance of being executed, but which mislead other traders into thinking there is an imbalance in the order book. Using the complete intraday order and trade data of the Korea Exchange (KRX) in a custom data set identifying individual accounts, we find that investors strategically placed spoofing orders which, given the KRX's order-disclosure rule at the time, created the impression of a substantial order book imbalance, with the intent to manipulate subsequent prices. This manipulation, which made use of specific features of the market microstructure, differs from previously studied forms of manipulation based on information or transactions. Roughly half of the spoofing orders were placed in conjunction with day trading. Stocks targeted for manipulation had higher return volatility, lower market capitalization, lower price level, and lower managerial transparency. We also find that spoofing traders achieved substantial extra profits. The frequency of spoofing orders decreased drastically after the KRX altered its order-disclosure rule.     

The impact of trading halts on liquidity and price volatility: Evidence from the Australian Stock Exchange

This study examines market behaviour around trading halts associated with information releases on the Australian Stock Exchange, which operates an open electronic limit order book. Using the Lee, Ready and Seguin (1994) pseudo-halt methodology, we find trading halts increase both volume and price volatility. Trading halts also increase bid-ask spreads and reduce market depth at the best-quotes in the immediate post-halt period. The results of this study imply that trading halts impair rather than improve market quality in markets that operate open electronic limit order books.     

Informed trading in hybrid bond markets

I study the impact of pretrade transparency on trading activity in an environment where dealers, informed and uninformed alike, can choose between an electronic limit order book (LOB) and an over-the-counter (OTC) market. By investigating bond dealers' choice in the hybrid Norwegian government bond market, I explore whether they base their trading strategy on the perceived informativeness of their trades. The results imply that bond dealers act strategically to preserve the value of their information by choosing the immediacy of the LOB when trades contain information. This suggests that OTC trades are exposed to a leakage of information to other dealers.     

Order Flow and Liquidity around NYSE Trading Halts

We study order flow and liquidity around NYSE trading halts. We find that market and limit order submissions and cancellations increase significantly during trading halts, that a large proportion of the limit order book at the reopen is composed of orders submitted during the halt, and that the market-clearing price at the reopen is a good predictor of future prices. Depth near the quotes is unusually low around trading halts, though specialists and/or floor traders appear to provide additional liquidity at these times. Finally, specialists appear to 'spread the quote' prior to imbalance halts to convey information to market participants.     

订单簿透明度对市场质量影响的实证研究

本文主要以行情揭示三档变五档的透明度变化事件来实证订单簿信息透明度对市场质量和订单行为的影响。结果发现,信息透明度提高之后,市场质量得到改善:一是市场流动性显著提高,二是市场波动性显著降低。其机理是透明度提高吸引了投机性投资者及流动性需求者提交订单,市场流动性得以提高,并降低了市场波动性,但是价格发现效率受到轻微影响。此外,研究还发现:(1)机构投资者下单数量和撤单数量减少,但是订单规模变大,表明其合并了小订单代之以大订单。(2)买单和卖单占比、订单久期、订单不平衡程度没有显著变化,但机构投资者撤单比例降低。     

Developing countries converging with developed-country accounting standards: Evidence from South Africa and Mexico

I examine the usefulness (relevance and timeliness) of earnings announcements in two emerging markets, the Johannesburg Stock Exchange (JSE) and the Bolsa Mexicana de Valores Stock Exchange (BMV). A weighted least-squares regression is used to test the association of book values of earnings and equity with firm market value. I find that, on JSE and BMV, earnings and/or book value of equity are value relevant in explaining stock prices. I also find that this association is greater in 2000 as compared to 1998 on the BMV. Regarding timeliness, I find that earnings announcements are accompanied by unusually different returns on JSE, but not on BMV. Market infrastructure, specifically insider-trading rules, may explain BMV results. I suggest that accounting and market infrastructure interact and that such interaction is valuable input to the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) in their deliberations regarding one set of accounting regulations for all countries.     

Is Off–Board Trading Detrimental to Market Liquidity?

Dual trading can have opposite effects: although competition between markets should induce dealers to offer cheaper transactions, market fragmentation could reduce market activity, liquidity, and exchange efficiency. This paper shows that for French stocks traded on the London Stock Exchange's SEAQ International (SEAQ–I), market activity decreases significantly in the Paris Bourse during UK bank holidays. Thus, SEAQ–I market makers seem to divert a new clientele to the Paris Bourse, increasing both market activity and the breadth of the Bourse's order book. Also, contrary to the fragmentation hypothesis, dual trading does not seem to increase information asymmetry.     

The information content of a limit order book: The case of an FX market

In this paper we examine the question of whether knowledge of the information contained in a limit order book helps to provide economic value in a simple trading scheme. Given the greater information content of the order book, over simple price information, it might naturally be expected that the order book would dominate. Using Dollar Sterling tick data, we find that despite the in-sample statistical significance of variables describing the structure of the limit order book in explaining tick-by-tick returns, they do not consistently add significant economic value out-of-sample. We show this using a simple linear model to determine trading activity, as well as a model-free genetic algorithm based on price, order flow, and order book information. We also find that the profitability of all trading rules based on genetic algorithms dropped substantially in 2008 compared to 2003 data.     

Price impact and bursts in liquidity provision

This paper analyses brief episodes of high-intensity quote turnover and revision—‘bursts’ in quotes—in the US equity market. Such events occur very frequently, several hundred times a day for actively traded stocks. We find significant price impact associated with these market maker initiated events, about five times higher than during non-burst periods. Bursts in quotes are concurrent with short-lived structural breaks in the informational relationship between market makers and market takers. During bursts, market makers no longer passively impound information from order flow into quotes—a departure from the traditional market microstructure paradigm. Rather, market makers significantly impact prices during bursts in quotes. Further analysis shows that there is asymmetry in adverse selection between the bid and ask sides of the limit order book and only a sub-population of market makers enjoys an informational advantage during bursts. Market makers on the side opposite the burst suffer elevated adverse selection costs, while market makers on the side of the burst realize positive spread, irrespective of the order flow direction. Our results call attention to the need for a new microstructure perspective in understanding modern high-frequency limit order book markets and the quote manipulation strategies at the disposal of the fast market makers.     

A comparison of Merton's option pricing model of corporate debt valuation to the use of book values

Many studies use the book value of debt as a proxy for its market value because most corporate debt does not trade. I call this practice the book value of debt (BVD) approximation, and it appears to be justified by the observation that the average market value of debt is close to its book value. Many corporate bonds, however, trade at values significantly different from their book values, and consequently the BVD approximation can create important biases. I compare the accuracy of the BVD approximation to Merton's option pricing (OPT) model of corporate debt valuation, and find consistent evidence that the Merton model provides more accurate estimates. I also show that this model is an easily estimated alternative to the BVD approximation. In short, the BVD approximation not only creates significant biases, but it is also an unnecessary simplification.