Trades > Cancels > Inserts

Trades > Cancels > Inserts

Trades by far have the most signal value; someone spent real money to cross the spread plus exchange fees. Passive order inserts, on the other hand, carry much less predictive value; they are, what economists would call, a cheap signal. After all, the likelihood of getting traded against before having the opportunity to cancel the order are usually very slim (the exception being price setting orders or orders joining a very short queue early in its life).

Cancels are an interesting intermediate case. Naively one would think that cancels must be even cheaper than inserts since they avoid incurring costs. This neglects a resting order's optionality value which depends on its position in the queue. Suppose you cancel an order and insert another one at the same price. The new order would join the back of the queue, i.e., you would have lost queue position. And as I have written previously (e.g. here), queue position has a huge impact on the execution quality (likelihood of getting filled and markout in case of a fill).

This position in the queue was "bought" by a lot of investment in tech (see e.g. here) or patience (see e.g. here). So, cancelling an order is not free unless the order already is last in the queue.

And because the loss of optionality depends on the queue position, one would assume that participants are more hesitant to pull orders the better their queue position is. Or, turning this argument around, if one observes an order being cancelled, then the signal value of this action should increase the closer to the front of the queue the order was. Unlike trades, it is not binary.

Exacerbating this could be that the participants' sophistication increases as one moves towards the front of the queue - think HFT, FPGAs. So, their decisions are likely to be well-informed.

Fig. 1 below demonstrates just that for the Euro STOXX 50 future (FESX) and the Bund future (FGBL) on Eurex. Using A7, we extract all cancels of orders while on the top level together with their pre-cancel queue position and whether or not the level ends up surviving or collapsing. We then compute the probability of the level surviving vs. the volume behind of the order before it was pulled.

No alt text provided for this image
Figure 1: Given an order cancellation on the top-level what is the probability of this level collapsing vs. the volume behind of the cancelled order?

Observations:

  1. The information value of cancels does indeed depend strongly on the order's queue position. Orders cancelled in the back of the queue carry no information whereas orders with volume behind are an increasingly good predictor for the level's future.
  2. The different decay scales depend on the instrument's book's thickness. But the levels are surprisingly similar.
  3. This is based on individual cancels. One could probably do much better if one also considered previous cancels on the same level; e.g. the running total of cancelled queue value.


#marketmaking #eurex #futurestrading #microstructure #algotrading #quantitativetrading #quantitativeresearch #hft #fpga

Justin Harper

High-Frequency Market Making

1 年

How are survival and collapse defined? Over a certain future time period?

要查看或添加评论,请登录

Stefan Schlamp的更多文章

  • Bullets Dodged, Bullets Caught

    Bullets Dodged, Bullets Caught

    Suppose you have a resting order in the limit order book. Your fair value model suggests that you should pull the order.

    8 条评论
  • Closing Auction Market Share - The Long View

    Closing Auction Market Share - The Long View

    There have been some recent studies that highlighted the increasing market share of the closing auction (see references…

  • Are Fill/Cancels to Blame?

    Are Fill/Cancels to Blame?

    Two weeks ago I decomposed market makers' profitability (or lack thereof) into a suite of market factors. This week I…

    3 条评论
  • Where'd Your Money Go?

    Where'd Your Money Go?

    Under ideal conditions (ideal from the market maker's point of view), the market maker earns the half-spread on every…

    8 条评论
  • Share Buyback Regs vs. Physics

    Share Buyback Regs vs. Physics

    The regulations for executing share buybacks are oddly specific. For example 2016/1052: Buy orders shall be entered or…

    3 条评论
  • Retail, Dark Midpoint, and CLOB Intraday Volume Profile

    Retail, Dark Midpoint, and CLOB Intraday Volume Profile

    Trades facilitated by retail liquidity providers and trades on the dark midpoint book can be distinguished from…

    3 条评论
  • Variability of Auction Liquidity

    Variability of Auction Liquidity

    Suppose you estimate your price impact on the auction uncrossing price based on some historical average. How far off…

  • Manz AG (M5Z)

    Manz AG (M5Z)

    On 20241218, trading in Manz AG (M5Z) was suspended on Xetra for an upcoming announcement. This turned out to be that…

  • Pie In The Sky

    Pie In The Sky

    Imagine two markets: In the first market, all trades mark out flat. In the second one, half the trades mark out +1, the…

    6 条评论
  • Go Big or Go Home - 2024Q4

    Go Big or Go Home - 2024Q4

    Table 1 is the quarterly round-up of the most noteworthy Xetra and Eurex trades of 2024Q4. Mostly on par with the…

    9 条评论

社区洞察

其他会员也浏览了