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Depths and spreads in futures markets: Relationship with order execution, submission, and cancellation

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  • Alex Frino
  • Ognjen Kovačević
  • Vito Mollica

Abstract

This paper examines the relationship between limit order submissions and liquidity. We find that there is a negative relationship between the limit order arrival rate and the depth at the best quotes (limit order queue length) and a positive relationship between submissions and bid–ask spreads. This is consistent with queuing theory, which predicts that an increase in the limit order arrival rate increases the queue length and the time to execution of a limit order. Consequently, limit order traders cover the increase in costs and risks associated with the increase in the time to execution of limit orders by increasing bid–ask spread.

Suggested Citation

  • Alex Frino & Ognjen Kovačević & Vito Mollica, 2019. "Depths and spreads in futures markets: Relationship with order execution, submission, and cancellation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(5), pages 590-599, May.
    • Handle: RePEc:wly:jfutmk:v:39:y:2019:i:5:p:590-599
    DOI: 10.1002/fut.21998
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    References listed on IDEAS

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