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A comprehensive test of order choice theory: recent evidence from the NYSE

Ellul, Andrew, Holden, Craig W., Jain, Pankaj and Jennings, Robert (2003) A comprehensive test of order choice theory: recent evidence from the NYSE. Discussion paper (471). Financial Markets Group, London School of Economics and Political Science, London, UK.

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We perform a comprehensive test of order choice theory from a sample period when the NYSE trades in decimals and allows automatic executions. We analyze the decision to submit or cancel an order or to take no action. For submitted orders we distinguish order type (market vs. limit), order side (buy vs. sell), execution method (floor vs. automatic), and order pricing aggressiveness. We use a multinomial logit specification and a new statistical test. We find a negative autocorrelation in changes in order flow exists over five-minute intervals supporting dynamic limit order book theory, despite a positive first-order autocorrelation in order type. Orders routed to the NYSE’s floor are sensitive to market conditions (e.g., spread, depth, volume, volatility, market and individual-stock returns, and private information), but those using the automatic execution system (Direct+) are insensitive to market conditions. When the quoted depth is large, traders are more likely to “jump the queue” by submitting limit orders with limit prices bettering existing quotes. Aggressively-priced limit orders are more likely late in the trading day providing evidence in support of prior experimental results.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2003 The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: G - Financial Economics > G1 - General Financial Markets > G10 - General
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 19 Aug 2009 09:48
Last Modified: 01 Dec 2020 00:09

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