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Fast and slow cancellations and trader behavior
Author(s) -
McInish Thomas H.,
NikolskoRzhevska Olena,
NikolskoRzhevskyy Alex,
Panovska Irina
Publication year - 2019
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12298
Subject(s) - market liquidity , order (exchange) , economics , monetary economics , limit (mathematics) , order book , business , microeconomics , finance , mathematical analysis , mathematics
We investigate how short‐lived liquidity supply due to order cancellations affects the order‐placement behavior of slow traders. When order cancellations increase, slow traders submit fewer and less aggressive orders. Both short‐ and long‐lived liquidity supply have positive effects on the market overall, reducing spreads and increasing depth. We conclude that it is not necessary to require limit orders to have a minimum lifespan. We develop econometric and machine‐learning frameworks that allow traders to predict whether a quote is likely to have a short or long life, increasing the ability of slow traders to respond strategically to changing order flow.