Execution Probability of Limit Orders on the Tokyo Stock Exchange
31 Pages Posted: 18 Dec 2000
Date Written: November 2000
We reconstruct order flow at the Tokyo Stock Exchange (TSE) for December 1998 from tick-by-tick transactions data that cover the entire market. The TSE is a pure order-driven market, and executions are carried out by matching limit orders on the limit order book with incoming market orders. We estimate probabilities of limit orders to be executed entirely within a day to find the following relationships:
1) execution probabilities of limit orders are low when the depth of the same side of the limit order book is thick;
2) execution probabilities are high when the depth of the opposite side of the book is thick;
3) execution probabilities are low when there are open ticks between the bid-ask spread; and
4) execution probabilities are higher for limit orders submitted during earlier times of the day.
These statistically significant evidences indicate that traders understand the implications of several factors of limit orders on the priority for their execution.
Keywords: Limit orders, market orders, execution probabilities, probit model, tick-by-tick data, bid-ask spreads
JEL Classification: G10, G15, G20
Suggested Citation: Suggested Citation