Abstract
Limit orders create risks to traders from publicly observed price changes in related markets.
We investigate how traders manage these risks by reviewing activity in National Australian
Bank (NAB) shares and exchange traded warrants from December 2003 through February
2004; a time when NAB made a number of important corporate disclosures. We find
evidence that warrant limit orders are updated quickly in response to changes in the
underlying share price, consistent with predictions from a “free option” model of limit orders.
Links between the limit orders include adjustments to the quoted depth as well as to the
quoted price. Limit orders that are more competitive (more likely to be taken) are updated
more aggressively. Asymmetries in bid and ask limit order adjustment appear to reflect
market practice, such as the prohibition on short-selling warrants.
We investigate how traders manage these risks by reviewing activity in National Australian
Bank (NAB) shares and exchange traded warrants from December 2003 through February
2004; a time when NAB made a number of important corporate disclosures. We find
evidence that warrant limit orders are updated quickly in response to changes in the
underlying share price, consistent with predictions from a “free option” model of limit orders.
Links between the limit orders include adjustments to the quoted depth as well as to the
quoted price. Limit orders that are more competitive (more likely to be taken) are updated
more aggressively. Asymmetries in bid and ask limit order adjustment appear to reflect
market practice, such as the prohibition on short-selling warrants.
| Original language | English |
|---|---|
| Number of pages | 33 |
| Publication status | Published - Jul 2007 |
| Event | Asian FA/FMA Meeting 2007 - Hong Kong, Hong Kong Duration: 1 Jan 2007 → … |
Conference
| Conference | Asian FA/FMA Meeting 2007 |
|---|---|
| Country/Territory | Hong Kong |
| Period | 1/01/07 → … |
| Other | Sun Jul 01 00:00:00 AEST 2007 |