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Order aggressiveness and order book dynamics 145
current best bid and ask price. Thus, we distinguish between “most aggressive”
limit orders (whose price undercuts or overbids the current best ask or bid limit
price, respectively), “aggressive” limit orders (which are placed directly in the
current first level of the ask or bid queue), and “normal” limit orders (which enter
the higher levels of the order book). Finally, cancelled limit orders are regarded as
the least aggressive orders. This classification is shown in Table 2.
Table 3 shows the average numbers of the different types of orders. We observe
that the proportions of the particular order types are not stable across stocks and
show clear variations. For instance, the percentage of aggressive market orders
varies between 2 and 7%. Accordingly, the proportion of most aggressive limit
order varies between 0.1 and 4%. On average, we observe a higher proportion of
the most aggressive ask limit orders than that of the corresponding bid limit orders.
Furthermore, it turns out that on average around 5% of all limit orders are
cancelled. An exceptionally high proportion of cancellations of around 11% is
observed for NCP.
In our empirical analysis, we focus on the three most interesting groups of
orders: aggressive buy and sell orders, most aggressive ask and bid limit orders as
well as ask and bid cancellations. Moreover, we introduce a further criterion for
order aggressiveness which goes beyond the scheme shown in Table 2. In
particular, we exclusively select only those orders which have a quoted volume
which is significantly above average. This additional selection criteria is applied
for two reasons: First, order aggressiveness is naturally linked to the size of the
posted volume. For economic significance, it makes a difference whether a small or
a high volume is quoted. For high volumes, the economic trade-off between the
costs of immediacy and the pick-off risk is much more relevant than for small
orders. Second, focussing exclusively on the big trades should reduce the noise in
the data and should help to identify distinct patterns and relationships. Since there
is a natural trade-off between focusing on orders whose order volumes are on the
one hand significantly above the average volume but, on the other hand, still
Table 2 Classification of order aggressiveness at the ASX
Aggressive buy order Quoted volume exceeds the first level of the standing ask volume
Normal buy order Quoted volume does not exceed the first level of the standing
ask volume
Most aggressive ask
order
Limit price undercuts the current best ask price
Aggressive ask order Limit price is at the current best ask price
Normal ask order Limit price is above the current best ask price
Cancelled ask order Cancellation of a standing ask order
Aggressive sell order Quoted volume exceeds the first level of the standing bid volume
Normal sell order Quoted volume does not exceed the first level of the standing
bid volume
Most aggressive bid
order
Limit price overbids the current best bid price
Aggressive bid order Limit price is at the current best bid price
Normal bid order Limit price is below the current best bid price
Cancelled bid order Cancellation of a standing bid order