Depths and spreads in futures markets

relationship with order execution, submission, and cancellation

Alex Frino, Ognjen Kovačević*, Vito Mollica

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

This paper examines the relationship between limit order submissions and liquidity. We find that there is a negative relationship between the limit order arrival rate and the depth at the best quotes (limit order queue length) and a positive relationship between submissions and bid–ask spreads. This is consistent with queuing theory, which predicts that an increase in the limit order arrival rate increases the queue length and the time to execution of a limit order. Consequently, limit order traders cover the increase in costs and risks associated with the increase in the time to execution of limit orders by increasing bid–ask spread.

Original languageEnglish
Pages (from-to)590-599
Number of pages10
JournalThe Journal of Futures Markets
Volume39
Issue number5
Early online date22 Jan 2019
DOIs
Publication statusPublished - May 2019

Keywords

  • bid–ask spread
  • depth
  • futures markets
  • liquidity

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