Large Large-Trader Activity Weakens the Long Memory of Limit Order Markets

Abstract

Using more than 6.7 billions of trades, we explore how the tick-by-tick dynamics of limit order books is influenced by the aggregate quarterly actions of large investment funds. In particular, we find that the well-established long memory of market order signs is markedly weaker when large investment funds trade in a directional way and even weaker when their aggregate participation ratio is large. Conversely, we investigate to what extent a weaker memory of market order signs predicts that an asset is being actively traded by large funds. Theoretical arguments suggest two candidate mechanisms that may contribute to the observed effect: a larger number of active meta-orders and a modification of the distribution of size of meta-orders. Empirical evidence suggests that the number of active meta-orders is probably the most important contributor to the reduction of market order sign memory.