Skip to main content
SpringerLink
Log in

Order cancellations across investor groups: evidence from an emerging order-driven market

  • Original Research
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

Employing comprehensive limit-order data that unambiguously identify investor groups, this paper examines the order-cancellation behavior across investor groups in the Taiwan Stock Exchange. First, facing trade-offs between the monitoring cost and limit-order risks, such as non-execution and free-trade-option risks, behavioral differences exist across investor groups. Foreign investors closely monitoring the market cancel their limit orders most actively, while individual investors with the highest monitoring cost do so least actively. Second, Tobit regressions show that the order cancellations by foreign investors are the most sensitive to the free-trade-option and non-execution risks, while those by individual investors are the least sensitive.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. For the definitions of marketable and non-marketable limit orders, please see Sect. 5.1.

  2. Aside for being an activity for traders managing their limit-order risks, order cancelations can possibly be regarded as strategic behavior of traders engaging in price manipulation (Yeo 2005; Kuk et al. 2015; Eom et al. 2013).

  3. Our results in Table 2 support this traditional wisdom. For example, the buy order volumes in 1000 shares for large- and small-cap stocks by foreign investors (domestics institutions) are respectively 13.524 and 7.504 (27.465 and 19.143), while those by individual investors are respectively 6.441 and 6.940.

  4. Unreported results show that foreign investors’ trading in Taiwan has been growing fast. The average dollar trading volume by foreign investors is much more than that by domestic institutions and the difference is widening, consistent with Chiao et al. (2006).

  5. According to Brockman and Chung (1999), trading activities are more intense right after the open and before the close, leading to a U-shaped intraday pattern in price volatility.

  6. Fong and Liu (2010) separate non-marketable limit orders into “price improve”, “at quote”, and “outside quote”, which may not be detailed enough to observe an inverted U-shaped pattern.

  7. For robustness, we use different price ranges to define the levels of order aggressiveness. The results are qualitatively equivalent to what we report in the context.

  8. As a robustness test, we divide the sample into price-priority groups based on different ranges from those in the context, and the qualitative changes do not essentially alter our conclusions.

  9. For brevity, the coefficients on the interval dummies are unreported, but available upon request.

  10. The unreported results for the pairwise comparisons of the coefficients on PUT i,t and CALL i,t between investor groups confirm that their order-cancelation sensitivities to the limit-order risks are different.

References

  • Ahn H, Bae K, Chan K (2001) Limit orders, depth, and volatility: evidence from the stock exchange of Hong Kong. J Finance 56:767–788

    Article  Google Scholar 

  • Aitken M, Almeida N, Harris FH, Mcinish TH (2007) Liquidity supply in electronic markets. J Finance Mark 10:144–168

    Article  Google Scholar 

  • Anand A, Chakravarty C, Martell T (2005) Empirical evidence on the evolution of liquidity: choice of market versus limit orders by informed uninformed traders. J Financ Mark 8:288–308

    Article  Google Scholar 

  • Biais B, Hillion P, Spatt C (1995) An empirical analysis of the limit order book and the order flow in the Paris Bourse. J Finance 50:1655–1689

    Article  Google Scholar 

  • Brockman P, Chung DY (1999) An analysis of depth behavior in an electronic, order-driven environment. J Bank Finance 23:1861–1886

    Article  Google Scholar 

  • Campbell JY, Grossman SJ, Wang J (1993) Trading volume and serial correlation in stock returns. Q J Econ 108:905–939

    Article  Google Scholar 

  • Chakrabarty B, Tyurin K, Han Z, Zheng X (2006) A competing risk analysis of executions and cancellations in a limit order market. CAEPR Working Paper No. 2006-015, Available at SSRN: http://ssrn.com/abstract=934785 or http://dx.doi.org/10.2139/ssrn.934785

  • Chakravarty S (2001) Stealth trading: which traders’ trades move stock prices? J Financ Econ 61:289–307

    Article  Google Scholar 

  • Chiao C, Cheng DC, Shao Y (2006) The informative content of the net-buy information of institutional investors in the Taiwan Stock Market: a revisit using conditional analysis. Rev Pac Basin Financ Mark Polic 9:661–697

    Article  Google Scholar 

  • Chiao C, Wang Z, Lai H (2009) Order submission behaviors and opening price behaviors: evidence from an emerging market. Rev Quant Finance Account 33:253–278

    Article  Google Scholar 

  • Chung K, Van Ness B, Van Ness R (1999) Limit orders and the bid-ask spread. J Financ Econ 53:255–287

    Article  Google Scholar 

  • Copeland TE, Galai TEC (1983) Information effects on the bid-ask spread. J Finance 38:1457–1469

    Article  Google Scholar 

  • Duong HN, Petko PS, Krishnamurti C (2009) Order aggressiveness of institutional and individual investors. Pac-Basin Finance J 17:533–546

    Article  Google Scholar 

  • Ellul A, Holden CW, Jain P, Jennings R (2007) Order dynamics: recent evidence from the NYSE. J Empir Finance 14:636–661

    Article  Google Scholar 

  • Eom KS, Lee EJ, Park KS (2013) Microstructure-based manipulation: strategic behavior and performance of spoofing traders. J Financ Mark 16:227–252

    Article  Google Scholar 

  • Falkenstein EG (1996) Preferences for stock characteristics as revealed by mutual fund portfolio holdings. J Finance 51:111–135

    Article  Google Scholar 

  • Fong KYL, Liu WM (2010) Limit order revisions. J Bank Finance 34:1873–1885

    Article  Google Scholar 

  • Foster FD, Liu WM (2008) Linking limit order book: Managing free options on options. Working Paper, University of New South Wales

  • Foucault T (1999) Order flow composition and trading costs in dynamic limit order markets. J Financ Mark 2:99–134

    Article  Google Scholar 

  • Foucault T, Roell A, Sandas P (2003) Market making with costly monitoring: an analysis of the SOES controversy. Rev Financ Stud 16:345–384

    Article  Google Scholar 

  • Frieder L, Subrahmanyam A (2005) Brand perceptions and the market for common stock. J Financ Quant Anal 40:57–85

    Article  Google Scholar 

  • Goldstein M, Kavajecz K (2000) Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE. J Financ Econ 56:125–149

    Article  Google Scholar 

  • Gompers PA, Metrick A (2001) Institutional investors and equity prices. Q J Econ 116:229–259

    Article  Google Scholar 

  • Griffiths MD, Smith B, Turnbull DAS, White RW (2000) The costs and determinants of order aggressiveness. J Financ Econ 56:68–88

    Article  Google Scholar 

  • Harris L (1998) Optimal dynamic order submission strategies in some stylized trading problems. Financ Mark Inst Instrum 7:1–76

    Article  Google Scholar 

  • Hasbrouck J, Saar G (2002) Limit orders and volatility in a hybrid market: the island ECN. Working Paper FIN-01-025, New York University, Available at SSRN: http://ssrn.com/abstract=310940 or http://dx.doi.org/10.2139/ssrn.310940

  • Hasbrouck J, Saar G (2009) Technology liquidity provision: the blurring of traditional definitions. J Financ Mark 12:143–172

    Article  Google Scholar 

  • Hollifield B, Miller RA, Sandas P (2004) Empirical analysis of limit order markets. Rev Econ Stud 71:1027–1063

    Article  Google Scholar 

  • Jain P (2005) Financial market design equity premium: electronic versus floor trading. J Finance 60:2955–2985

    Article  Google Scholar 

  • Kang J, Stulz R (1997) Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan. J Financ Econ 46:3–28

    Article  Google Scholar 

  • Kaniel R, Liu H (2006) So what orders do informed traders use? J Bus 79:1867–1914

    Article  Google Scholar 

  • Kuk J, Liu WM, Pham PK (2015) Strategic order submission and cancellation in pre-opening periods: the case of IPO firms. Working Paper, Available at SSRN: http://ssrn.com/abstract=1362484 or http://dx.doi.org/10.2139/ssrn.1362484

  • Lee Y, Liu Y, Roll R, Subrahmanyam A (2004) Order imbalances and market efficiency: evidence from the Taiwan Stock Exchange. J Financ Quant Anal 39:327–341

    Article  Google Scholar 

  • Liang J, Lin M, Chin C (2012) Does foreign institutional ownership motivate firms in an emerging market to increase voluntary disclosure? Evidence from Taiwan. Rev Quant Finance Account 39:55–76

    Article  Google Scholar 

  • Liu WM (2009) Monitoring limit order submission risks. J Financ Mark 12:107–141

    Article  Google Scholar 

  • Liu WM, Sawyer KR (2003) How free are free trading options? Pac-Basin Finance J 11:573–591

    Article  Google Scholar 

  • Madhavan A (1992) Trading mechanisms in securities markets. J Finance 47:607–642

    Article  Google Scholar 

  • Madhavan A, Panchapagesan V (2000) Price discovery in auction markets: a look inside the black box. Rev Financ Stud 13:627–658

    Article  Google Scholar 

  • Menkhoff L, Osler CL, Schmeling M (2010) Limit-order submission strategies under asymmetric information. J Bank Finance 34:2665–2677

    Article  Google Scholar 

  • Parlour C (1998) Price dynamics in limit order markets. Rev Financ Stud 11:789–816

    Article  Google Scholar 

  • Ranaldo A (2004) Order aggressiveness in limit order book markets. J Financ Mark 7:53–74

    Article  Google Scholar 

  • Shefrin H, Statman M (2012) Behavioral finance in the financial crisis: market efficiency, Minsky, and Keynes. In: Blinder AS, Lo AW, Solow RM (eds) Rethinking the financial crisis. Russell Sage Foundation, New York, pp 99–135

    Google Scholar 

  • Stoll H (2003) Market microstructure. In: Constantinides GM, Harris M, Stulz RM (eds) Handbook of the economics of finance. Elsevier, Amsterdam, pp 553–604

    Google Scholar 

  • Stoll H (2006) Electronic trading in stock markets. J Econ Perspect 20:153–174

    Article  Google Scholar 

  • Yeo W (2005) Cancellations of limit orders. Working Paper, National University of Singapore, Available at SSRN: http://ssrn.com/abstract=681042 or http://dx.doi.org/10.2139/ssrn.681042

Download references

Author information

Authors and Affiliations

  1. Department of Finance, National Dong Hwa University, Hualien, Taiwan

    Chaoshin Chiao

  2. Department of Finance, Ming Chuan University, Taipei, Taiwan

    Zi-May Wang & Shiau-Yuan Tong

Authors
  1. Chaoshin Chiao
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Zi-May Wang
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Shiau-Yuan Tong
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Chaoshin Chiao.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Chiao, C., Wang, ZM. & Tong, SY. Order cancellations across investor groups: evidence from an emerging order-driven market. Rev Quant Finan Acc 49, 1167–1193 (2017). https://doi.org/10.1007/s11156-017-0620-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-017-0620-6

Keywords

JEL Classification

Search

Navigation