Market conditions and order-type preference |
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| Institution: | 1. Audencia Business School, Research Center: Markets Technology and Society, 8 Route de la Joneliere, 44312 Cedex 3, Nantes, France;2. Heriot Watt University, Accounting, Economics and Finance SEEC, CFI, Edinburgh, Scotland EH14 4AS, UK;1. School of Public Administration, Nanjing university of Finance and Economics, China;2. Department of History of Science, Technology and Medicine, Peking University, China;1. Department of Economics and Finance, SHU-UTS SILC Business School, Shanghai University, Shanghai 201800, China;2. Department of Finance, Goodman School of Business, Brock University, Ontario, Canada;3. Department of Economics and Finance, College of Business Administration, University of Texas-El Paso, El Paso, TX 79968, USA;1. School of Finance, Zhejiang Gongshang University, Hangzhou 310018, Zhejiang, China;2. School of Finance, Southwestern University of Finance and Economics, Chengdu 611130, Sicuan, China |
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| Abstract: | This paper proposes a methodology to investigate the relative preference of limit orders when changes in market conditions lead to temporary violations of the zero-profit condition. We formulate this preference as a function of the intraday structural price components of information and liquidity, the time variation in which is driven by expectations of an expandable set of measures of time varying market conditions. This is then used to investigate when the equilibrium zero-profit condition might be violated, which would lead to a preference for a particular order type. The resulting theoretical and empirical predictions of advanced microstructural pricing models suggest that limit orders should be preferred during periods of intense market activity, such as periods of high volume and short duration, when the price components are positively correlated, and during periods of less intense activity when the components are negatively correlated. |
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