Order Execution Quality in Equity Options Markets

In Part 1, we examine the effects of an order cancellation fee on limit order behavior and execution quality on the NASDAQ OMX PHLX. We find that the cancellation fee is effective in reducing the rate at which limit orders are submitted and subsequently deleted. Order volume declines, however, the remaining displayed orders appear to constitute more genuine liquidity, as the duration of canceled orders lengthens. The reduction in order cancellation activity is associated with lower effective spreads and higher order fill rates. We also find that differences in trading venues and option characteristics are important determinants of order cancellations in options markets. Overall, our results suggest that reducing excessive order cancellation activity may improve the quality of liquidity provision and, consequently, enhance order execution quality. In Part 2, we examine if the priority rules, such as price-time or pro-rata, which govern the order matching process on an exchange, affect limit order quality and transaction outcomes. Our multivariate tests show that the probability of execution is higher in the price-time model, while time-to-execution is significantly shorter in the pro-rata model. We also provide evidence that traders risk over-trading in the pro-rata model by submitting large order sizes to achieve a desire fill amount and then cancel the remaining contracts. In Part 3, we examine the impact of option quote stuffing and trading spikes on market quality. We find that quote stuffing and trading spikes in U.S. equity options are more frequently observed on exchanges using price-time priority, relative to exchanges using pro-rata priority. Our multivariate analysis shows that quote stuffing reduces the probability of execution and lengthens the time-to-execution on option orders. We also find that both quote stuffing and trading spikes are associated with transitory frictions in option order execution prices. In addition, we find that bid-ask spreads in the underlying securities increase, with a one-minute lag, around option quote stuffing episodes. Overall, our analysis provides evidence that quote stuffing and trade spikes reduce both liquidity and order execution quality in securities markets.

Name thesis:degree_name

Ph.D. in Business Administration

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Finance

Year dc:date.available

2017

Author dc:creator

• Griffith, Todd Gardner

Contributors dc:contributor

• Robert A. Van Ness
• Charles C. Dibrell
• Bonnie F. Van Ness

• Limit Orders
• Order Execution Quality
• Priority Rules
• Quote Stuffing
• Trading Spikes
• Finance

Repository record dc:identifier

https://egrove.olemiss.edu/etd/1359

OAI identifier oai:identifier

oai:egrove.olemiss.edu:etd-2358