scholarly journals Tick Size and Informed Trading: Evidence from the Taiwanese Stock Market

2021 ◽  
Vol 15 (1) ◽  
pp. 1
Author(s):  
Chang-Wen Duan ◽  
Ken Hung ◽  
Shinhua Liu
Keyword(s):  
Stock Market ◽  
Adverse Selection ◽  
Informed Trading ◽  
Order Book ◽  
Monitoring Cost ◽  
Tick Size ◽  
Informed Traders ◽  
Call Auction ◽  
Order Books ◽  
The Impact

We adopt the Sandås model for order-book equilibrium to examine informed trading on the Taiwanese stock market, a purely order-driven call-auction market. We find that adverse-selection cost is low for well-known stocks with high liquidity and low volatility, but cost is high for monitoring the order books of those stocks. Our empirical results show that the impact of adverse selection is greatest at the beginning of each trading day and that informed traders engage in stealth trading, supporting the stealth trading hypothesis. Finally, with the special tick size rules on the market, both adverse-selection cost and monitoring cost decline as tick size decreases.

scholarly journals The Impact of Iceberg Orders in Limit Order Books

2017 ◽  
Vol 07 (03) ◽  
pp. 1750007 ◽  
Author(s):  
Stefan Frey ◽  
Patrik Sandås
Keyword(s):  
Informed Trading ◽  
Price Impact ◽  
Order Book ◽  
Limit Order ◽  
Reduced Order ◽  
Market Participants ◽  
Limit Orders ◽  
Order Books ◽  
Limit Order Books ◽  
The Impact

We examine the impact of iceberg orders on the price and order flow dynamics in limit order books. Iceberg orders allow traders to simultaneously hide a large portion of their order size and signal their interest in trading to the market. We show that when market participants detect iceberg orders they tend to strongly respond by submitting matching market orders consistent with iceberg orders facilitating the search for latent liquidity. The greater the fraction of an iceberg order that is executed, the smaller is its price impact consistent with liquidity rather than informed trading. The presence of iceberg orders is associated with increased trading consistent with a positive liquidity externality, but the reduced order book transparency associated with iceberg orders also creates an adverse selection cost for limit orders that may partly offset any gains.

scholarly journals Information Distribution and Informed Trading in Mixed and Islamic Capital Markets

2021 ◽  
Vol 21 (3) ◽  
pp. 1333-1351
Author(s):  
Rahma Tri Benita ◽  
Siti Damayanti ◽  
Irwan Adi Ekaputra
Keyword(s):  
Stock Market ◽  
Strategic Behavior ◽  
Saudi Arabian ◽  
Informed Trading ◽  
Competitive Behavior ◽  
Information Distribution ◽  
Market Participants ◽  
Informed Traders ◽  
Distribution Process ◽  
Mixture Of Distribution Hypothesis

The correlation between volume and frequency with return volatility can explicate the information distribution process and informed traders' transaction behavior in a stock market. In this study, the Indonesian stock market represents the mixed market, while the Saudi Arabian stock market represents the Islamic market. We find that 94% and 96% of sharia-compliant stocks in Indonesia and Saudi Arabia follow the Mixture of Distribution Hypothesis (MDH). Consequently, we may conclude that sharia-compliant stocks in both markets are informationally efficient. However, we find that informed traders tend to behave differently in both markets. In the Indonesian market, informed traders exhibit competitive behavior in 95% of shariacompliant stocks and strategic transaction behavior in only 5% of the stocks. In contrast, in the Saudi Arabian market, we find that informed traders exhibit competitive behavior in only 38% of the stocks and strategic behavior in 62% of the stocks. The findings suggest that social and religious contexts may affect market participants' behavior.

scholarly journals Instantaneous Order Impact and High-Frequency Strategy Optimization in Limit Order Books

2017 ◽  
Vol 03 (02) ◽  
pp. 1850001 ◽  
Author(s):  
Federico Gonzalez ◽  
Mark Schervish
Keyword(s):  
High Frequency ◽  
Stock Exchange ◽  
Markov Chain Model ◽  
Optimal Order ◽  
Order Book ◽  
Chain Model ◽  
Limit Order ◽  
Limit Orders ◽  
Order Books ◽  
The Impact

We propose a limit order book (LOB) model with dynamics that account for both the impact of the most recent order and volume imbalance. To model these effects jointly we introduce a discrete Markov chain model. We then find the policy for optimal order choice and control. The optimal policy derived uses limit orders, cancellations and market orders. It looks to avoid non-execution and adverse selection risk simultaneously. Using ultra high-frequency data from the NASDAQ stock exchange we compare our policy with other submission strategies that use a subset of all available order types and show that ours significantly outperforms.

scholarly journals Optimal Auction Duration: A Price Formation Viewpoint

2021 ◽  
Author(s):  
Jusselin Paul ◽  
Mastrolia Thibaut ◽  
Rosenbaum Mathieu
Keyword(s):  
Supply And Demand ◽  
Price Formation ◽  
Continuous Limit ◽  
Order Book ◽  
Limit Order ◽  
Market Makers ◽  
Optimal Auction ◽  
Order Of Magnitude ◽  
Order Books ◽  
The Impact

Optimal Auction Duration in Financial Markets In the considered auction market, market makers fill the order book during a given time period while some other investors send market orders. The clearing price is set to maximize the exchanged volume at the clearing time according to the supply and demand of each market participant. The error made between this clearing price and the efficient price is derived as a function of the auction duration. We study the impact of the behavior of market takers on this error to minimize their transaction costs. We compute the optimal duration of the auctions for 77 stocks traded on Euronext and compare the quality of the price formation process under this optimal value to the case of a continuous limit order book. Continuous limit order books are usually found to be suboptimal. Order of magnitude of optimal auction durations is from 2–10 minutes.

scholarly journals Impact of the Adjustment of Maximum Order Volume on Pricing Efficiency of Stock Index Futures in China

2020 ◽  
Vol 2020 ◽  
pp. 1-20
Author(s):  
Liang Wang ◽  
Tingjia Xu ◽  
Longhao Qin ◽  
Xianyan Xiong
Keyword(s):  
Futures Market ◽  
Informed Trading ◽  
Stock Index ◽  
Stock Index Futures ◽  
Order Book ◽  
Maximum Order ◽  
Index Futures ◽  
Pricing Efficiency ◽  
Probability Of Informed Trading ◽  
The Impact

In April 2017, China Financial Futures Exchange adjusted the maximum order volume of single trading in stock index futures, and this paper conducts research on this event. Firstly, it analyzes the influence of the adjustment of maximum order volume on the characteristics of the limit order book with high-frequency data and the impact of ordering situation on the trading depth and volatility of each contract with panel data. Secondly, it takes high-frequency tick-by-tick data to explore the causal relationship between the ordering situation and the probability of informed trading and analyzes the impact of the event on the probability of informed trading. Finally, the dynamic factor analysis method is used to quantify the pricing efficiency based on the probability of informed trading and the characteristics of limit order book, and the influence of the event on the pricing efficiency of stock index futures market is discussed. The results show that the reduction of maximum order volume has different effects on dominant contracts and nondominant contracts of stock index futures. After the event, the overall trading volume of the market increased, where the trading volume of dominant contracts decreased and that of nondominant contracts increased. For dominant contracts, the depth, slope, and liquidity decrease, the spread increases, and the probability of informed trading decreases so that the pricing efficiency becomes worse, while the results of nondominant contracts are the opposite. For Chinese stock index futures market, the pricing efficiency is greatly reduced and the resource allocation capacity is weakened under the influence of the event. Therefore, the adjustment of maximum order volume is not conducive to the healthy development of the stock index futures market. It is suggested that the reduction of the maximum order volume is only implemented for nondominant contracts.

The information content of the thinner order book following tick size reduction

2014 ◽  
Vol 40 (3) ◽  
pp. 218-233
Author(s):  
Cheng-Yi Chien ◽  
Tzu-Hsiang Liao ◽  
Hsiu-Chuan Lee
Keyword(s):  
Information Content ◽  
Stock Exchange ◽  
Limit Order Book ◽  
Order Book ◽  
Tick Size ◽  
Limit Order ◽  
Content Type ◽  
Taiwan Stock Exchange ◽  
Using Data ◽  
The Impact

Purpose – This paper aims to examine the impact of a reduction in tick size on the information content of the order book by using data from the Taiwan Stock Exchange (TWSE). Design/methodology/approach – To estimate the information content of the order book, the modified information share proposed by Hasbrouck and extended by Lien and Shrestha is used in this paper. Findings – The empirical results show that the limit order book is informative. Furthermore, the results indicate that a reduction in tick size will decrease the information content of the order book and the decrease in the information content of the order book is positively related to the thinner order book. Originality/value – This paper suggests that, in order to enhance the information content of the order book, the TWSE should disclose the full limit order book.

Oil market pricing and the impact on stock market

2018 ◽  
Vol 24 (1) ◽  
pp. 178-188
Author(s):  
A.Yu. Mikhailov ◽  
◽  
T.F. Burova ◽  
Keyword(s):  
Stock Market ◽  
Market Pricing ◽  
Oil Market ◽  
The Impact
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