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Algos gone wild: What drives the extreme order cancellation rates in modern markets?

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  • Khomyn, Marta
  • Putniņš, Tālis J.

Abstract

97% of orders in US stock markets are cancelled before they trade, straining market infrastructure and raising concerns about predatory or manipulative trading. To understand the drivers of these extreme cancellation rates, we develop a simple model of liquidity provision and find that growth in order-to-trade ratios (OTTRs) is driven by fragmentation of trading and technological improvements that lower monitoring costs. High OTTRs occur legitimately in stocks with high volatility, fragmented trading, small tick sizes, and low volume. OTTRs are usually within levels consistent with market making, but occasionally spike to levels that may indicate illegitimate trading such as spoofing.

Suggested Citation

  • Khomyn, Marta & Putniņš, Tālis J., 2021. "Algos gone wild: What drives the extreme order cancellation rates in modern markets?," Journal of Banking & Finance, Elsevier, vol. 129(C).
    • Handle: RePEc:eee:jbfina:v:129:y:2021:i:c:s0378426621001291
    DOI: 10.1016/j.jbankfin.2021.106170
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    References listed on IDEAS

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    Cited by:

    1. Petter Dahlström & Björn Hagströmer & Lars L. Nordén, 2024. "The determinants of limit order cancellations," The Financial Review, Eastern Finance Association, vol. 59(1), pages 181-201, February.

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    More about this item

    Keywords

    Order-to-trade ratio; Market fragmentation; Regulation; Liquidity; HFT;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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