University of Mississippi eGrove Electronic Theses and Dissertations Graduate School 2016 Order Behavior In High Frequency Markets Brian Roseman University of Mississippi Follow this and additional works at: https://egrove.olemiss.edu/etd Part of the Finance Commons Recommended Citation Roseman, Brian, "Order Behavior In High Frequency Markets" (2016). Electronic Theses and Dissertations. 562. https://egrove.olemiss.edu/etd/562 This Dissertation is brought to you for free and open access by the Graduate School at eGrove. It has been accepted for inclusion in Electronic Theses and Dissertations by an authorized administrator of eGrove. For more information, please contact [email protected]. ORDER BEHAVIOR IN HIGH FREQUENCY MARKETS BRIAN ROSEMAN DISSERTATION PRESENTED IN PARTIAL FULFILLMENT OF REQUIREMENTS FOR THE DOCTOR OF PHILOSPHY IN BUSINESS ADMINSTRATION, DEPARTMENT OF FINANCE, UNIVERSITY OF MISSISSIPPI MAY 2016 Copyright Brian Scott Roseman 2016 ALL RIGHTS RESERVED ABSTRACT In Part 1, I study the characteristics of short orders in stock markets. Fleeting orders are quick limit orders that remain on the limit order book for only a few seconds before being canceled, and are significantly different than more patient, static, limit orders that are added to the limit order book and await execution. I investigate the impact that fleeting orders have on spread and depth measures of market quality, and how fleeting orders differ from static orders. Attention is also given to the extent that total depth can be decomposed into the two components of fleeting and static depth. The results suggest that static orders have a positive impact on both spread and depth. However, fleeting orders have little impact on total liquidity. The results suggest that fleeting orders contribute noise to markets, and do not positively impact the spread and depth components of liquidity. This result is robust to the simultaneous issue that order submission strategies depend on current market quality conditions. In Part 2, I investigate the link between orders and trades in equity markets. A substantial body of research on limit order markets investigates the characteristics of orders and the characteristics of trades. However, there has been little research on how the characteristics of orders impact the characteristics of trades. I investigate the impact that marketable orders and limit orders have on the resulting trade characteristics. In addition, we test theoretical predictions on how market characteristics, like time of day and depth, impact order and trade characteristics. Lastly, in Part 3, I investigate the causes, and effects of intraday flash crashes. Breakdowns in financial markets occur when the market is not able to facilitate its principal responsibilities of liquidity provision and price discovery. In this paper we look at flash crashes, a special type of market breakdown. These crashes are generally non-fundamental in nature, and the market making responsibilities of liquidity and price discovery are only temporarily suspended for a short period before rebounding to pre-crash levels. This paper analyzes intraday flash crashes, primarily focusing on three aspects of flash crashes: crash frequency, crash triggers, and the impact on market quality once the crash has seceded. ii DEDICATION This dissertation is dedicated to my wife, who encouraged and supported me through this process, and to my parents who have always motivated me to always give my best effort. iii ACKNOWLEDGEMENTS I express my appreciation to my dissertation chair, Dr. Robert Van Ness, and to my committee members, Dr. Bonnie Van Ness, Dr. Andre Liebenberg, and Dr. Bart Garner, for their guidance, help, and support through this process. iv APPENDIX OF CONTENTS Title page .............................................................................................................................. i Acknowledgement of Copyright Abstract ................................................................................................................................ ii Dedication ............................................................................................................................. iii Acknowledgements ............................................................................................................... iv Appendix of Contents ........................................................................................................... v Lists of Appendices............................................................................................................... vii Part 1: More Depth to Depth: Liquidity of Fleeting and Static Orders ................................ 1 Introduction ............................................................................................................... 2 Background ............................................................................................................... 7 Data and Methods .................................................................................................... 10 The Impact of Fleeting and Static Depth on Total Liquidity ................................... 18 Theoretical Implications of Fleeting Liquidity ........................................................ 29 Conclusion ................................................................................................................ 32 References ................................................................................................................. 34 Appendix ................................................................................................................... 37 Part 2: Order and Trade Characteristics in Equity Markets .................................................. 66 Introduction ............................................................................................................... 67 Hypotheses ................................................................................................................ 70 Data and Methods ..................................................................................................... 74 v Results ....................................................................................................................... 79 Conclusion ................................................................................................................ 90 References ................................................................................................................. 91 Appendix ................................................................................................................... 94 Part 3: Breakdowns in Financial Markets: Flash Crashes and Liquidity Crises ................... 121 Introduction ............................................................................................................... 122 Background and Hypotheses..................................................................................... 127 Data and Methods ..................................................................................................... 130 Results ....................................................................................................................... 136 Conclusion ................................................................................................................ 144 References ................................................................................................................. 146 Appendix ................................................................................................................... 149 VITA…. ................................................................................................................................ 169 vi LISTS OF APPENDICES Part 1: More Depth to Depth: Liquidity of Fleeting and Static Orders 1. Firm Summary Statistics ...................................................................................... 38 2. Order Characteristics ........................................................................................... 40 3. Depth Summary Statistics ..................................................................................... 42 4. Fleeting and Static Depth against Total Depth ..................................................... 45 5. Cost and Percent of Time to Complete a Round Trip Trade ................................ 47 6. The Contribution of Fleeting and Static liquidity on Total Liquidity ................... 50 7. The Contribution of Fleeting and Static Depth on Total Depth ............................ 52 8. Endogeneity and Simultaneity of Depth and Fleeting Orders .............................. 54 9. Depth and Volume Quintiles ................................................................................ 56 10. Are Fleeting Orders only Submitted Within the Spread ..................................... 58 11. Do Fleeting Orders Create Constant Forecastable Depth ................................... 60 12. Fleeting and Static Order Price Competiveness.................................................. 62 13. Fleeting and Static Limit Order Book Behavior throughout the Trading Day ... 64 Part 2: An Analysis of Penny Stocks and Listed Securities Trading Under Five Dollars 1. Definitions of Trade Prints and Order Classifications .......................................... 95 2. Daily Summary Statistics ...................................................................................... 97 3. Order and Trade Characteristics and