| Abstract: |
MTS markets are an example of quote driven electronic order book markets for
Government securities. Proposals are firm, immediately executable and
aggregated in a limit order book. In this paper we analyse the evolution of
the interaction between the order book and order flow by exploring the
determinants of the flows of limit and market orders over three years. We are
able to test several hypotheses coming from theoretical models. This is, to
our knowledge, one of the first empirical test of these hypotheses based on
Government bond data. We find that market and limit orders show positive
autocorrelation and clustering as in Biais et al. (1995). No activity is
clustered as well. This diagonal effect could also explain the positive impact
of book depth near the quote on the flows of new limit orders. On the
contrary, depth beyond the second best price seems to play no role in book
dynamics. Furthermore, increasing competition, measured as an increase in the
number of operators, has a negative effect on orders. In addition, we find
mild support to the theoretical prediction of a positive effect of book depth
on order aggressiveness. Best spread, instead, behaves consistently with
theoretical models: a larger best spread encourages new limit orders
inside-thequote. |