Order submission strategies of institutional and individual investors

Abstract

This thesis provides three essays on the order submissions of institutional and individual investors in a limit order book market, the Australian Stock Exchange (ASX). In addition, the thesis examines the effect of the removal of broker identifications (IDs) on investors’ order submissions on the ASX. Using the concept of order aggressiveness, which reflects investors’ impatience for trading, the first essay investigates the decision of institutional and individual investors to demand liquidity (submit market orders) and supply it (place limit orders). The findings indicate that the order aggressiveness of institutional and individual investors is positively related to the same-side market depth and negatively related to the opposite-side market depth and the bid-ask spread. Institutional investors are also more aggressive in their order submissions when volatility increases in large capitalization (cap) stocks, whereas both institutional and individual investors are less aggressive when volatility increases in medium (mid) cap stocks. Institutions and individuals follow different order submission patterns throughout the trading day, with institutions being more aggressive early in the trading day and individuals becoming more aggressive as trading progresses. Finally, following the removal of broker IDs on the ASX, both institutional and individual investors become less aggressive and more willing to supply liquidity and display their orders in the central limit order book. The second essay focuses on the information content of the limit order book and examines how it is impacted by the removal of broker IDs. This essay documents a negative relation between future volatility and variations in the liquidity provision in the order book, as captured by the order book slope. This essay also shows that the slope of the limit order book on the demand (buy) side is more informative about future volatility than the slope of the limit order book on the supply (sell) side. Institutional investors’ limit orders are also more informative about future volatility than individual limit orders. Finally, institutional limit orders become more informative about future volatility after the removal of broker IDs on the ASX, whereas minimal impact is observed for the informativeness of individual limit orders. Overall, the results in the first and second essays imply that the removal of broker IDs on the ASX makes investors more willing to submit and expose their informative limit orders in the limit order book. Therefore, this thesis supports the ASX’s decision to stop disclosing broker identity information in the central limit order book. The third essay examines the volume-volatility relation and the roles of the number of trades and average trade size, institutional trading and individual trading, and order imbalance in the volume-volatility relation. This essay provides evidence supporting a positive relation between trading volume and volatility. In addition, the number of trades has a more significant effect on volatility than average trade size. When the number of trades is decomposed into the number of trades of different sizes, the number of trades in the medium size category often has the most significant impact on volatility. This essay also shows that institutional trading and individual trading are positively related to volatility and individual trading often has a more significant effect on volatility than institutional trading. Finally, the findings in this essay indicate that on the ASX, a limit order book market, order imbalance is not the main factor behind the volume-volatility relation.