An Empirical Investigation On The Order Book Information And Trader Activities In A Pure Limit Order Market

A key focus of empirical work on limit order markets is the relative importance of individual pieces of information in characterizing order submission and trade execution. This paper enlarges this focus to include an examination of pricing behavior, using intraday data on stocks trading in a pure electronic limit order book market. A theoretical link between order, trade, and cancellation arrival rates is empirically implemented. I use the autoregressive conditional duration (ACD) model of Engle and Russell (1998) to analyze the modeling of trader behavior.As a centralized, computerized, limit order market, the Shenzhen Stock Exchange (SSE) in China is particularly appropriate for studying the interaction between the order book and order flow. Firstly descriptive methods capture the richness of the data and distinctive aspects of the market structure. Order flow is concentrated near the quote, while the depth of the book is somewhat smaller at nearly valuations. We analyze the supply and demand of liquidity. For example, thin books elicit orders and thick books results in trades. To gain price and time priority, investors quickly place orders within the quotes when the depth at the quotes or the spread is large. Consistent with information effects, downward (upward) shifts in both bid and ask quotes occur after large sales (purchases). Secondly I devote to analyze duration models differentiated by information sets. Finally evaluation of models across different information sets is based on relative ability to predict market activity out-of-sample.A main finding of the paper is the importance and superiority ofinformation embodied in continuous individual traders' actions in characterizing order submission behavior. The book information on characteristics of resting orders alone cannot explain subsequent order submission, trade, or pricing behavior.