The behaviour of limit order quotes and trading activity are studied using a unique and rich database that includes the identity of market participants from a fully automated derivatives market. The analysis is performed using transactions records for three aggregated trader types and three trade identifiers, with trades stamped in milliseconds for the SXF, the equity futures contract of the Montreal Exchange. The identifiers distinguish trades between principals; agency based trades, as well as transactions that are conducted for risk management as opposed to speculative purposes. Agency related trades are shown to represent the largest amount of trading activity relative to other account types. Over 90% of trades in this electronic market are limit orders. The limit order book, especially the depth 1 order, has a dominant role in providing liquidity and in explaining market participants trading behaviour. Participants in the SXF reference their trades to the best limit order depth. Hence, investors with large positions or investors who want to build a large position have to strategically split large orders to close/build their position, according to the depth of the best limit order, to ameliorate price impact and information leakage effects. In addition, the results show that traditionally measured spreads have no relationship with trading costs.
Keywords: Limit orders, Trading activity, Transactions costs, Electronic trading
JEL Classifications: G13, G14, G18.
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1 Lorne N. Switzer, Corresponding author, Associate Dean, Research, Professor of Finance, Van Berkom Endowed Chair, and Associate Director, Institute for Corporate Governance of Private and Public Organizations, Finance Department.
John Molson School of Business, Concordia University, 1455 De Maisonneuve Blvd. W., Montreal, Quebec, CANADA H3G 1M8, (email: switz@jmsb.concordia.ca).
Tel. +514 848 2960, Fax: + 514 481 4561.
2 Haibo Fan, Research Associate, Concordia University.