Algos gone wild: What drives the extreme order cancellation rates in modern markets?

Khomyn, Marta; Putniņš, Tālis J.

doi:10.1016/j.jbankfin.2021.106170

Cited by 4 publications

(7 citation statements)

References 27 publications

(22 reference statements)

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“…First, their impact on the cancellation HR shows that the expected profit at execution is more influential than the probability of execution. This finding supports theoretical models that take a liquidity supply perspective to understand limit order cancellations, such as Khomyn & Putniņš (2021) and Roşu et al. (2021); and more broadly, the liquidity supply models by Glosten (1994) and Sandås (2001).…”

Section: Introductionsupporting

confidence: 83%

“…The negative influence of Futures Price Change is consistent with market-wide signals affecting correlated securities, as documented in Khomyn & Putnin , š (2021). The trade-based variables are all statistically significant, but they have 13 Specifically, the STC is the change in the restricted mean survival time following a one standard deviation increase in the explanatory variable in question.…”

Section: Resultssupporting

confidence: 54%

“…The strength of our PDHM is that it allows the hazard rate to evolve with market events during the order lifetime, while controlling for executions and order‐specific market conditions. Stock‐level effects, as described by Khomyn & Putniņš (2021) and Roşu et al. (2021) are captured with baseline hazard rates (akin to stock fixed effects in a panel regression).…”

Section: Empirical Model and Explanatory Variablesmentioning

confidence: 99%

“…The US Securities and Exchange Commission (SEC) reports that, for each trade observed in US stocks in 2020, there were on average 14 cancellations at the national best bid and offer (BBO) prices. Khomyn & Putniņš (2021) show theoretically that cancellation rates, like the one reported by the SEC, are driven by technological improvements that lower the cost of order monitoring, and by market conditions such as fragmentation, volatility, and trading volume. Roşu et al.…”

Section: Introductionmentioning

confidence: 99%

“…This phenomenon has not been documented in the previous literature. The LOB depth variables remain significant when controlling for other determinants, including LOB price changes (Hasbrouck & Saar, 2009), inventory management (Hendershott & Menkveld, 2014), cross‐market liquidity supply (van Kervel, 2015), and returns of related securities (Khomyn & Putniņš, 2021). We also use the LOB depth variables to show that cancellations are primarily due to market making (as in the models by Khomyn & Putniņš, 2021; and Roşu et al., 2021) rather than to liquidity‐demanding strategies (as hypothesized by Ranaldo, 2004; and Hasbrouck & Saar, 2009), and to quantify the importance of the limit order queue position to cancellations.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

The determinants of limit order cancellations

Dahlström

Hagströmer

Nordén

2023

The Financial Review

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Almost all limit orders are canceled. We examine two economic channels that can motivate cancellations: reductions in the expected profit at execution, and reductions in the probability of execution. An order‐level analysis shows that changes in depth at the best bid and offer prices, as well as changes in the order queue position, influence cancellation in a way consistent with the former channel, that market makers monitor the expected profit at execution of each limit order. Although buy‐side investors use passive orders extensively, our findings indicate that limit order cancellations on aggregate are best understood through models of liquidity provision.

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