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Limit order submission risks, order choice, and tick size

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  • Yamamoto, Ryuichi

Abstract

We propose empirical measures of non-execution and picking-off risks and demonstrate that a minimum tick size reduction decreases non-execution risk but increases picking-off risk on the Tokyo Stock Exchange. This results in a higher tendency to submit aggressive orders for some stocks and cancel limit orders for the others. We conclude that our two limit order submission risks are crucial for understanding the results of past empirical studies that examine how minimum tick size reduction impacts limit order submission risks and why traders become aggressive in their order choice. We further show that our proposed measures of non-execution and picking-off risks are better variables than are proxies for the two risks such as spread (which have been suggested by previous empirical studies) or transaction cost measured by the relative tick size when analyzing the determination of the order choice and/or evaluating a minimum tick size reduction policy.

Suggested Citation

  • Yamamoto, Ryuichi, 2020. "Limit order submission risks, order choice, and tick size," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:pacfin:v:59:y:2020:i:c:s0927538x19302732
    DOI: 10.1016/j.pacfin.2019.101261
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    References listed on IDEAS

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    Cited by:

    1. Maruyama, Hiroyuki & Tabata, Tomoaki, 2022. "Timing of tick size reduction: Threshold and smooth transition model analysis," Finance Research Letters, Elsevier, vol. 45(C).
    2. Zhu, Hongyu & Yamamoto, Ryuichi, 2022. "Order submission, information asymmetry, and tick size," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    Limit order submission risk; Order aggressiveness; Tick size; Market microstructure; Tokyo stock exchange;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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