Price Discovery without Trading: Evidence from Limit Orders

Brogaard, Jonathan; Hendershott, Terrence and Riordan, Ryan (2019): Price Discovery without Trading: Evidence from Limit Orders. In: The Journal of Finance, Vol. 74, No. 4: pp. 1621-1658

Abstract

We analyze the contribution to price discovery of market and limit orders by high-frequency traders (HFTs) and non-HFTs. While market orders have a larger individual price impact, limit orders are far more numerous. This results in price discovery occurring predominantly through limit orders. HFTs submit the bulk of limit orders and these limit orders provide most of the price discovery. Submissions of limit orders and their contribution to price discovery fall with volatility due to changes in HFTs’ behavior. Consistent with adverse selection arising from faster reactions to public information, HFTs’ informational advantage is partially explained by public information.

• Item Type: Journal article
• Faculties: Munich School of Management > Institute for Financial Innovation and Technology
• Subjects: 300 Social sciences > 330 Economics
• Language: English