Fast and slow cancellations and trader behavior
We investigate how short-lived liquidity supply due to order cancellations affects the order-placement behavior of slow traders. When order cancellations increase, slow traders submit fewer and less aggressive orders. Both short- and long-lived liquidity supply have positive effects on the market overall, reducing spreads and increasing depth. We conclude that it is not necessary to require limit orders to have a minimum lifespan. We develop econometric and machine-learning frameworks that allow traders to predict whether a quote is likely to have a short or long life, increasing the ability of slow traders to respond strategically to changing order flow.
McInish, T., Nikolsko-Rzhevska, O., Nikolsko-Rzhevskyy, A., & Panovska, I. (2020). Fast and slow cancellations and trader behavior. Financial Management, 49 (4), 973-996. https://doi.org/10.1111/fima.12298