The determinants of limit order cancellations

Abstract

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.

The end of an era: Who paid the price when the livestock futures pits closed?

“…3 Conclusions in VW could be understood by considering a common functional form of risk aversion, such as the constant absolute risk aversion utility function (CARA), which posits that risk averse traders would always prefer a lower, but certain, payoff to a higher expected payoff with enough variation (uncertainty) in the payoff. This translates quite well into our setup because the pit users we observe choose to trade at the pit when time to execution increases, and we argue in our analysis that time to execution can be a good proxy for uncertainty on whether a customer's limit orders sitting on the book would be executed or not (Dahlström et al, 2023). Thus, we use time to execution, or the need to trade immediately in order to eliminate execution uncertainty, to capture the risk averse aspect of traders in VW's model.…”