Order Dynamics: Recent Evidence from the NYSE

Andrew Ellul, Indiana University Craig W. Holden, Indiana University Pankaj Jain, University of Memphis Robert Jennings, Indiana University

Goal and Motivation

Empirically characterize traders order choice under dynamic market conditions Order submission and cancellation decisions determine liquidity-provision and liquidity-usage

better understanding of the price formation process determinants of execution quality

Analyze NYSE in 2001

All trades are in decimals Allows automatic execution (Direct+) Have all SuperDOT orders, but no orders worked by floor brokers

Theoretical Predictions Tested

Negative Serial Correlation in Order Type -Parlour 98 Prior trader submits market buy consumes liquidity relatively more attractive to submit limit sell replenish liquidity

Cycle of consuming and replenishing liquidity negative serial correlation in order type (MB less likely to follow MB) Puzzle: Biais, Hillion and Spatt (1995) found positive serial correlation in order type (MB more likely to follow MB) LOB will grow more imbalanced and eventually break down

Traders Patience Handa and Schwartz (1996)

Model traders timeframe for completing trade Impatient choose market orders; Patient choose limit order Extend logic highly impatient choose fast auto ex with little regard for market conditions; More patient choose floor executions with meaningful regard for market conditions

More Literature

Other Variables Suggested By Theory Depth Parlour (1998)

Time-of-day Harris (1998), Parlour (1998), Bloomfield, OHara and Saar (2002) and others Quoted Spread Cohen, Maier, Schwartz, Witcomb (1981), Harris (1998), Foucault (1999) and others Volatility Foucault (1999) Market and Own Return Lo, Mamaysky and Wang (2000) Related Empirical Studies Harris (1998) Hollifield, Miller and Sandas (1999,2002) Ahn, Bae and Chan (2001) Bae, Jang and Park (2002) NYSE using 90-91 TORQ Beber and Caglio (2002) NYSE using 90-91 TORQ Hasbrouck and Saar (2002) Ranaldo (2002)

Data

NYSE System Order Database (SOD) over April June 2001 148 stocks stratified by price and volume Detailed info on:

order submission (time, type, size, etc.) orders outcome: execution, cancellation, or expiration

Hypotheses 1

Negative Serial Correlation in Order Type for Individual Orders Hypothesis:

Prior limit buy (sell) lower prob limit buy (sell)

Negative Serial Correlation in Order Type for Aggregated Order Flows Hypothesis:

Higher limit buys (sells) in prior 5 min lower limit buys (sells) in current 5 min

Short-term Forecasting Hypothesis:

Large ask (bid) depth prob limit sell (buy) and prob market sell (buy)

Hypotheses 2

Jump-The-Queue Hypothesis:

Large ask (bid) depth Prob inside limit sell (buy) and prob at or behind limit sell (buy)
Time Prob various order types changes

Time of Day Hypothesis:

Trader Impatience Hypothesis:

Auto-ex sensitivity to market conditions < floor sensitivity to market conditions

Methodology

Analyze choices of representative trader = weighted average over all trader types Multinomial logit with 7-way event structure

Market Buy, Market Sell, Limit Buy, Limit Sell, Cancel Buy, Cancel Sell, No Activity

(45% of limit orders are cancelled) No activity event = stock-specific amount of clock time with no order submissions or cancellations Median time between successive order events or 5 minutes, whichever is less For 8 stocks = 1 second; for 50 stocks = 5 minutes

By Aggregated Order Flow

Aggregate buys and sells Aggregate same 7 events by 5 min int.

Market buy, market sell, limit buy, limit sell, cancel buy, cancel sell, no activity

Estimate 7 OLS equations with the same independent variables aggregated by 5 min int

13-way Multinomial Logit

Dependent variable = 13-way event structure

Limit Buy More aggressive Limit Sell Worse-than-the-quote At-the-quote Inside-the-quote Marketable Marketable More aggressive Marketable Marketable Inside-the-quote At-the-quote Worse-than-the-quote

Above $30.10 Ask = $30.10 $30.01 - $30.09 Bid = $30.00 Below $30.00

4 types of Limit Buys, 4 types of Limit Sells, Market Buy, Market Sell, Cancel Buy, Cancel Sell, No Activity Event

Explanatory Variables

Last Event Market Buy (dummy) Last Event Market Sell (dummy) Last Event Limit Buy (dummy) Last Event Limit Sell (dummy) Last Event Cancel Buy (dummy) Last Event Cancel Sell (dummy) Relative National Best Bid size (/ shrs outstand) Relative National Best Ask size (/ shrs outstand) Time (number of 5 min since midnight)

Control Variables

Percent Spread Relative Volume (ln vol(t-5)/Shrs outstand) Own Return (% chg in midpoint (5 min)) Own Return Squared Volatility Market Return (5 min % chg SP500 ETF) Time Squared (deviation from midday sqr) U-shape patterns Day Return

Order by Order 13 way: positive serial correlation

Change in aggregated order flow: negative correlation

Conclusion

Neg Serial Corr in Order Type by Ind Orders = Reject Neg Serial Corr in Order Type by Agg Flows=Support Resolves puzzle and supports Parlour model Short-term Forecasting = Support Jump-the-Que = Support Depth impacts in both ways Time-of-day = Support Supports Bloomfield, OHara, and Saar experimental evidence Trader Impatience = Support Supports Handa & Schwartz logic applied to Auto-ex