Transparency , Information Content and Order Placement Strategy

1
Transparency , Information Content and Order
Placement Strategy

• Tai Ma, Yaling Lin, Hsiu-Kuei Cheng
• Department of Finance, National Sun Yat-sen
  University

2
Introduction

• Increasing pre-trade transparency in Taiwan
  Stock Exchange
• Before July 1st, 2002 only the best price is
  disclosed.
• Since July 1st, 2002 the volume of best bid/ask
  is disclosed additionally.
• Beginning in 2003 both the price and volume of
  the best five unexecuted orders are disclosed

3
Introduction

• How much additional information is valuable after
  grater transparency?
• How does additional information influence order
  strategies of individual and institutional
  investors?

4
Related Research

• Traders choices between market and limit orders
  
• limit orders are not as informative as market
  orders e.g., Glosten, 1994Angel, 1994Rock,
  1996 Harris, 1998 .
• informed traders would prefer to submit limit
  orders rather than market orders e.g.,
  Bloomfield, Ohara and Saar(2005)and Kaniel and
  Liu(2006).

5
Related Research

• LOB information affects traders behavior
• the state of LOB will influences the forthcoming
  order flow e.g., Handa and Schwartz(1996),
  Parlour(1998)and Foucault(1999), Coppejans and
  Domowitz (2002) , Biais et al.(1995),Griffiths
  et al.(2000),Hollifield et al.(2003), and Ranaldo
  (2004) .
• the impact of LOB information beyond its first
  step on investors strategies e.g., Cao, Hansh
  and Wang (2003) and Pascual and Veredas (2003) .

6
Related Research

• Comment
• none of these studies has measured the
  information content of the book beyond its first
  step for different types of investors .They do
  not connect the information content and order
  placement strategy with transparency
  enhancement.

7
Contribution

• The first one to combine the issues of LOB
  information content, investors order strategies
  and transparency.
• Exploring information content of the best quote
  and the quote beyond the best for different kinds
  of traders.
• Investigating the transparency impact on
  different types of traders order placement
  strategies.

8
Sample Period

• 1st stage
• least transparent Feb-02?Jun-02
• 2nd stage
• partially transparent Jul-02?Dec-02
• 3rd stage
• most transparent Mar-03?Jun-03

9
Samples and subsamples

• 50 stocks listed in the Taiwan Stock Exchange.

10
Samples and sub-samples

• Time Series for Analysis (Information content)
• In the second stage
• In the third stage

11
Methodology

• Information share of LOB
• VAR (vector autoregressive model)
• Partial transparent period
• 1?model1 2?model2
• The most transparent period
• 1?model3 2?model4

12
The Information content of LOB

• Vector Autoregressive Model
• Information content
• the percentage of variation in trading prices
  (volume) due to posted bid/ask price (bid/ask
  volume).
• Model 1 (2nd stage ) (back)

13
The Information content of limit order book

• Model 2 (2nd stage ) (back)

14
The Information content of limit order book

• Model 3 (3rd stage ) (back)

15
The Information content of limit order book

• Model 4 (3rd stage ) (back)

16
Methodology

• Order Strategies
• (aggressiveness of buyers)
• C1 bid price maximum price limit
• C2 best ask lt bid price lt maximum price limit
• C3 best bid lt bid price lt best ask
• C4 bid price best bid
• C5 best bid minus two ticks lt bid price lt best
  bid
• C6 minimum price limit lt bid price lt best bid
  minus two ticks

17
Methodology

• Order Strategies
• (aggressiveness of sellers)
• C1 ask price minimum price limit
• C2 minimum price limit lt ask price lt best bid
• C3 best bid lt ask price lt best ask
• C4 ask price best ask
• C5 best ask lt ask price lt best ask add two
  ticks
• C6 best ask add two ticks lt ask price lt
  maximum price limit

18
Methodology

• Order Probit Model
• Aggressiveness index (C1 to C6)
• Explanatory variables
• LOB first step information
• DS1(DO1)The best quote depth on the
  same(opposite)side
• LOB information beyond the first step
• DS25(DO25) The accumulative quote depth from
  step2 to step5 on the same (opposite) side.
• LS12(LO12)The distance between the best and
  second best quote on the same (opposite) side.
• LS25(LO25)The distance between the second and
  fifth best quoteon on the same (opposite)
  side..

19
Empirical Results

• 1.Information contents
• 1.1 Summary Statistics for Information share
• Disclosing bid price and volume have more
  information content than ask price and volume,
  especially in the most transparent period.
• Table 2 (stage 2) Table 3 (stage 3)

20
Empirical Results (BACK)

• 1.2 Test results of information content
• In the partial transparent market , the best
  quote price has more information content than the
  best quote volume when we decompose the trading
  price. Table4 (stage 2)
• Institutional traders unmatched orders provide
  more information content than individual traders.
  Table4 (stage 2)
• Table5(stage 3)

21
Empirical Results

• The best quote price and the average step2 to
  step5 quote price
• Individual traders best bid/ask of unexecuted
  orders always has more information content than
  the average of step2 to step5 quote price
  Table5
• Institutional investors average of step2 to
  step5 quote price contains the same information
  as the best unexecuted orders at least. Table5

22
Empirical Results

• Orderplacement strategies
• 2.1 Summary Statistics for Orderplacement
  strategies
• orders are distributed evenly among all
  aggressive categories except the sub-aggressive
  category(C2) Table6

23
Empirical Results

• 2.2 Transparency and orderplacement strategies
• stage 1 into stage 2 or 3 both institutional and
  individual investors reduce the most aggressive
  orders(C1), and C3 as well as C4 increase
  instead.
• stage 2 into stage 3 the increasing tendency in
  C3 is more striking for institutional investors
  buy orders .
• Table7

24
Empirical Results

• 2.3 Probit model the determinants of order
  aggressiveness.
• the order aggressiveness of all sub-samples
  performs significant positive first-order
  autocorrelation.
• The sign of the margin trading dummy is positive
  ,especially for individual traders
• When the spread widens, the order aggressiveness
  will decline , especially for individual traders
  and sell orders.
• Table8 Table9

25
Empirical Results

• 2.3 Probit model the determinants of order
  aggressiveness.
• The order submission depends mostly on the best
  quote and corresponding depth, the disclosures
  beyond step 1 still have explanatory power.
• Quote depth
• The aggressiveness is positive(negative)with
  the book depth on the same(opposite)side .This
  trend is more evident for the best quote than
  the quote beyond the first.
• The accumulated depth at step2 to 5 has more
  significant effect on individual strategies.
• The aggressiveness of buyers is affected more
  by opposite-side depth, while the sellers are
  more concerned about the same side depth
• Table8 Table9

26
Empirical Results

• 2.3 Probit model the determinants of order
  aggressiveness.
• Quote price
• Investors become more aggressive with smaller
  quote distance on the same side or with larger
  quote distance on the opposite side.
• This trend is more evident for the best quote
  than the step2 to step5 quote price,
  institutional buy orders are only exception.
• Order submissions are affected by the quote
  distance of the same side rather than the
  opposite side.

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Conclusion--Informaiton content

• The LOB information content of buy orders is
  more than that of sell orders.
• the quote price is more informative than the
  quote volume.
• Institutional traders unmatched orders provide
  more information content than individual traders.
  

28
Conclusion--Informaiton content

• the individual traders best quote always has
  more information content than the average 2nd to
  5th quote, while it is not true for institutional
  investors.

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ConclusionOrder placement strategy

• Higher transparency makes all investors reduce
  unnecessarily costly orders.
• The competition among institutional traders is
  stronger than individual traders as transparency
  increases.
• Investors not only utilize the best quote and
  depth to make decisions but also use the
  information beyond step 1 of the book.

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ConclusionOrder placement strategy

• Investors are more aggressive as the same side of
  the book is more crowded and the opposite side of
  the book is more disperse.
• the depth of limit order book has quite
  diversified effects on order submission for the
  buyers, sellers, institutional and individual
  investors .

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Table 2 Summary Statistics for Information
share in the partially transparent market (stage
2) (BACK)

• The number in the cell is the percentage of
  information share. We list the results for buy
  and sell orders
• separately. Investors are classified into
  informed (institutional) and uninformed(individual
  )traders.
• Moreover, "bid1" is the best bid, "bidq1" is the
  volume of best bid, "ask1" is the best ask and
  "askq1" is the volume of best ask.

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Table 3 Summary Statistics for Information
share in the most transparent market (stage 3)
(BACK)

• "bid1" is the best bid, "bid25" is the average
  of step 2 to step 5 bid price, "bidq1" is the
  volume of best
• bid, "bidq25" is the average of step 2 to step 5
  bid volume, "ask1" is the best ask, "ask25" is
  the average
• of step 2 to step 5 ask price, "askq1" is the
  volume of best ask and "askq25" is the average of
  step 2 to
• step 5 ask volume.

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Table 4 Difference in the information share of
trading price and volume in the partial
transparent market (stage 2) (BACK)
34
Table 5 Difference in the information share of
trading price and volume in the most transparent
market (stage 3) (BACK1) (BACk2)
35
Table 6 Distribution of order types by
institutional and individual investorsBACK
36
Table 7 Differences in order aggressiveness
between stages of various transparency levels
Back
37
Table 8 Ordered Probit Model of Order Choice
for Institutional Investors

Back1 Back2
38
Table 9 Order Probit Model of Order Choice for
Individual Investors

Back1 Bacl2