FIN-01-025 |
NYU Stern School of Business |
|
Limit Orders and Volatility in a Hybrid Market: The Island ECN
September 26, 2001
Joel Hasbrouck and Gideon Saar
ABSTRACT
This paper is an empirical analysis of trading activity on the Island ECN, an electronic
communications network for US equities, which is organized as an electronic limit order
book. The approach is cross-sectional across firms. The goal is to characterize the firm-specific
determinants of Island activity, with particular emphasis on the volatility of the
firm’s stock. We find that Island’s market share for a given firm is positively related to
the overall level of Nasdaq trading in the firm. Across a number of volatility proxies, we
find that higher volatility is associated with
- a lower proportion of limit orders in the incoming order flow
- a higher probability of limit order execution
- shorter expected time to execution
- lower depth in the book.
In addition, we find substantial use of hidden limit orders (for which the submitter has
opted to forgo display of the order). Finally, over one quarter of the limit orders
submitted to Island are canceled (unexecuted) within two seconds or less. The extensive
use of these “fleeting” orders is at odds with the view that limit order traders (like
dealers) are patient providers of liquidity.
Gideon Saar
Institution: Leonard N. Stern School of Business, New York University
Telephone: 212-998-0318
Fax: 212-995-4233
Email: gsaar@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~gsaar
Joel Hasbrouck
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0310
Fax: (212) 995-4233
Email: jhasbrou@stern.nyu.edu
Homepage:
www.stern.nyu.edu/~jhasbrou
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