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Order-Flow Phases Around Market Orders in Limit Order Books

Article arXiv papers · Author: Julius Bonart et al.
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Summary

This study examines how orders enter and leave a limit order book around the arrival of a market order. Using a recent, high-quality Nasdaq data set, the authors identify distinct phases in order flow for each stock studied and find that net order flow varies substantially across those phases. The analysis focuses on empirical patterns before and after market orders rather than proposing a trading strategy.

Some observations align with stimulated refill, in which liquidity returns after a trade, while others do not. To account for the differing patterns, the authors suggest alternative mechanical and strategic explanations. They argue that liquidity providers weigh both adverse-selection risk and the expected cost of waiting when choosing how to respond. The excerpt does not specify the stocks, sample period, phase definitions, or statistical tests, so it offers a high-level account of findings rather than enough detail to assess their strength or generality.

Key ideas

  • The study measures limit order book flow before and after market orders using Nasdaq data.
  • Order flow passes through distinct phases, with different net flows across phases.
  • Some findings are consistent with liquidity refill after trades, while others are not.
  • Liquidity providers may balance adverse-selection risk against the cost of waiting.
  • The excerpt omits sample details and statistical results needed to judge generality.

Tags

EquitiesMarket microstructureExecutionStatistics
Full text
# Latency and liquidity provision in a limit order book


# Latency and liquidity provision in a limit order book









We use a recent, high-quality data set from Nasdaq to perform an empirical analysis of order flow in a limit order book (LOB) before and after the arrival of a market order. For each of the stocks that we study, we identify a sequence of distinct phases across which the net flow of orders differs considerably. We note some of our results are consist with the widely reported phenomenon of stimulated refill, but that others are not. We therefore propose alternative mechanical and strategic motivations for the behaviour that we observe. Based on our findings, we argue that strategic liquidity providers consider both adverse selection and expected waiting costs when deciding how to act.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.