Dynamic order placement strategies and stock market quality: further evidence from a new approach

Abstract

Recent studies have documented that limit order revision and cancellation activities play an important role in creating dynamic order placement strategies. By utilising a new approach, this thesis provides further evidence on order placement strategies, their determinants and their effects on the stock market quality. Firstly, this thesis constructs the full life for each limit order as a series of successive order events. Survival analyses with both single-spell and multiple-spell duration models are employed to examine the determinants of dynamic limit order placement strategies in the Australian Securities Exchange (ASX). This thesis is, perhaps, the first study which employs such a new approach in this area of research. Limit order placement strategies are found to be determined by limit order characteristics, by conditions of the stock market where the limit order is placed, as well as by the previous duration of the limit order. Secondly, this thesis creates a measure for dynamic limit order placement activities and examines how these activities affect the stock market quality. Using a system of simultaneous equations, the thesis finds that order placement activities are increased in response to market turbulence such as heightened volatility and reduced liquidity. The results suggest that the stock market quality is significantly improved as traders intensify their activities, including revising or cancelling their limit orders. However, this positive effect is only found in the early period before the structural changes of the ASX. Following ASX’s migrations to lower-latency exchanges, the intensity of order placement activities tends to reduce the stock market quality. Thirdly, this thesis investigates dynamic limit order placement strategies and their aggressiveness in a low-latency market environment. The study employs a new approach with a multiple-spell duration model to examine the factors that contribute to the decision of traders to cancel or revise limit orders, as well as the decision to opt for an aggressive or a defensive strategy. The results provide evidence in support for both the ‘chasing hypothesis’ and the ‘cost of immediacy hypothesis’ of limit orders. The findings of this thesis are significant for researchers, market regulators as well as other stock market participants.