Why is order flow so persistent?

Abstract

Order flow in equity markets is remarkably persistent in the sense that order signs (to buy or sell) are positively autocorrelated out to time lags of tens of thousands of orders, corresponding to many days. Two possible explanations are herding, corresponding to positive correlation in the behavior of different investors, or order splitting, corresponding to positive autocorrelation in the behavior of single investors. We investigate this using order flow data from the London Stock Exchange for which we have membership identifiers. By formulating models for herding and order splitting, as well as models for brokerage choice, we are able to overcome the distortion introduced by brokerage. On timescales of less than a few hours the persistence of order flow is overwhelmingly due to splitting rather than herding. We also study the properties of brokerage order flow and show that it is remarkably consistent both cross-sectionally and longitudinally.

42 pages, 15 figures

References in corpus (4)

• Scaling laws of strategic behaviour and size heterogeneity in agent dynamics
• The adaptive nature of liquidity taking in limit order books
• A Theory for Market Impact: How Order Flow Affects Stock Price
• Market efficiency and the long-memory of supply and demand: Is price impact variable and permanent or fixed and temporary?

Cited by in corpus (24)

• Cross-response in correlated financial markets: individual stocks
• The adaptive nature of liquidity taking in limit order books
• Average cross-responses in correlated financial market
• Can we infer microscopic financial information from the long memory in market-order flow?: a quantitative test of the Lillo-Mike-Farmer model
• Order flow in the financial markets from the perspective of the Fractional Lévy stable motion
• Microscopic Understanding of Cross-Responses between Stocks: a Two-Component Price Impact Model
• The Epps effect under alternative sampling schemes
• A simple learning agent interacting with an agent-based market model
• A Stationary Kyle Setup: Microfounding propagator models
• Understanding the nature of the long-range memory phenomenon in socioeconomic systems
• Statistical properties of market collective responses
• Price response functions and spread impact in correlated financial markets
• Quantitative statistical analysis of order-splitting behaviour of individual trading accounts in the Japanese stock market over nine years
• Emergence of Cooperative Long-term Market Loyalty in Double Auction Markets
• Long-range memory test by the burst and inter-burst duration distribution
• Simulating and analyzing order book data: The queue-reactive model
• Foreign exchange markets: price response and spread impact
• Price response in correlated financial markets: empirical results
• Discrete $q$-exponential limit order cancellation time distribution
• Exact solution to a generalised Lillo-Mike-Farmer model with heterogeneous order-splitting strategies
• Comparing the market microstructure between two South African exchanges
• A New Traders' Game? -- Empirical Analysis of Response Functions in a Historical Perspective
• Market impact as anticipation of the order flow imbalance
• Order flow and price formation