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Order aggressiveness and quantity: How are they determined in a limit order market?

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  • Lo, Ingrid
  • Sapp, Stephen G.

Abstract

Dealers trading in a limit order market must choose both the order aggressiveness and the quantity for their orders. Since little research has considered how dealers make this trade-off, we empirically investigate how dealers jointly make these decisions in the foreign exchange market using a unique simultaneous equations model. Our model uses an ordered probit model to account for the discrete nature of order aggressiveness and a censored regression model to capture the quantity decision recognizing the clustering of orders at the smallest available quantity, $1 million. Using two currency pairs with very different trading characteristics, we find evidence of a trade-off between order aggressiveness and quantity. We also find a significant role being played by factors related to the levels of information asymmetry and liquidity in the dealers' choices of both the order aggressiveness and quantity.

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  • Lo, Ingrid & Sapp, Stephen G., 2010. "Order aggressiveness and quantity: How are they determined in a limit order market?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(3), pages 213-237, July.
    • Handle: RePEc:eee:intfin:v:20:y:2010:i:3:p:213-237
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    More about this item

    Keywords

    International finance Market microstructure Foreign exchange Limit order book;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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