TY - JOUR
T1 - Algos gone wild
T2 - What drives the extreme order cancellation rates in modern markets?
AU - Khomyn, Marta
AU - Putniņš, Tālis J.
N1 - Funding Information:
We thank two anonymous referees, Shane Miller, Maureen O'Hara, Terry Walter, Zhuo Zhong, Katja Ignatieva, Yong Jin, Hao Ming Chen, seminar participants at 7th SIRCA Young Researcher's Workshop, Auckland Finance Meeting 2017, FMA Asia-Pacific Conference 2018, FMA Annual Meeting 2018, Australian Securities and Exchange Commission, Chi-X Australia, and University of Technology Sydney for helpful comments. Marta Khomyn gratefully acknowledges funding from the Capital Markets CRC Limited and was a visiting researcher at Chi-X Australia during the time spent on this study. T?lis J. Putni?? gratefully acknowledges funding from the Australian Research Council (ARC DP200101445).
Funding Information:
We thank two anonymous referees, Shane Miller, Maureen O’Hara, Terry Walter, Zhuo Zhong, Katja Ignatieva, Yong Jin, Hao Ming Chen, seminar participants at 7th SIRCA Young Researcher’s Workshop, Auckland Finance Meeting 2017, FMA Asia-Pacific Conference 2018, FMA Annual Meeting 2018, Australian Securities and Exchange Commission, Chi-X Australia, and University of Technology Sydney for helpful comments. Marta Khomyn gratefully acknowledges funding from the Capital Markets CRC Limited and was a visiting researcher at Chi-X Australia during the time spent on this study. Tālis J. Putniņš gratefully acknowledges funding from the Australian Research Council ( ARC DP200101445 ).
Publisher Copyright:
© 2021
PY - 2021/8
Y1 - 2021/8
N2 - 97% of orders in US stock markets are cancelled before they trade, straining market infrastructure and raising concerns about predatory or manipulative trading. To understand the drivers of these extreme cancellation rates, we develop a simple model of liquidity provision and find that growth in order-to-trade ratios (OTTRs) is driven by fragmentation of trading and technological improvements that lower monitoring costs. High OTTRs occur legitimately in stocks with high volatility, fragmented trading, small tick sizes, and low volume. OTTRs are usually within levels consistent with market making, but occasionally spike to levels that may indicate illegitimate trading such as spoofing.
AB - 97% of orders in US stock markets are cancelled before they trade, straining market infrastructure and raising concerns about predatory or manipulative trading. To understand the drivers of these extreme cancellation rates, we develop a simple model of liquidity provision and find that growth in order-to-trade ratios (OTTRs) is driven by fragmentation of trading and technological improvements that lower monitoring costs. High OTTRs occur legitimately in stocks with high volatility, fragmented trading, small tick sizes, and low volume. OTTRs are usually within levels consistent with market making, but occasionally spike to levels that may indicate illegitimate trading such as spoofing.
KW - HFT
KW - liquidity
KW - market fragmentation
KW - order-to-trade ratio
KW - regulation
UR - http://www.scopus.com/inward/record.url?scp=85107781063&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2021.106170
DO - 10.1016/j.jbankfin.2021.106170
M3 - Article
AN - SCOPUS:85107781063
VL - 129
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
M1 - 106170
ER -