Order Aggressiveness, Price Impact, and Investment Performance in a Pure Order‐Driven Stock Market

• DOI: http://doi.org/10.1111/ajfs.12102
• Date: 01 August 2015
• Author: An‐Sing Chen,Pi‐Hsia Hung,Yun‐Lin Wu
• Published date: 01 August 2015

Order Aggressiveness, Price Impact, and

Investment Performance in a Pure Order-

Driven Stock Market*

Pi-Hsia Hung

Department of Banking and Finance, National Chi Nan University

An-Sing Chen**

Department of Finance, National Chung Cheng University

Yun-Lin Wu

Department of Banking and Finance, National Chi Nan University

Received 5 August 2013; Accepted 20 April 2015

Abstract

This study provides an order-level angle, which is more directly mapped to traders ’

initial trading requirement, to investigate the relationship between order aggressive-

ness, price impact, and investment performance. Our results reveal several findings.

First, dealers exhibit the most aggressive trading behavior. Second, traders’ order

aggressiveness is affected by market conditions. Third, mutual funds and foreign

investors apparently influence transitory price movements through their direct buy-

ing behavior, rather than their order aggressiveness. Fourth, foreign investors’

aggressive buy orders perform better than other traders in both bearish and bullish

markets. Fifth mutual funds’ aggressive selling is related to informed trading.

Keywords Individuals; Institutions; Intraday data; Microstructure; Order submission

JEL Classification: G02, G11, G23

1. Introduction

There are no officially designated market makers or specialists in a pure order-dri-

ven stock market such as the Taiwan Stock Exchange (TWSE). Therefore, the liq-

uidity of the market is provided by public orders, and so-called market orders do

*Hung acknowledges financial support from the Ministry of Science and Technology of Tai-

wan (Grant no: MOST 103-2410-H-260-013).

**Corresponding author: An-Sing Chen, Department of Finance, National Chung Cheng

University, No. 168, Section 1, University Road, Min-Hsiung Township, Chia-Yi County 621,

Taiwan. Tel: +886-5-242-8246, Fax: +886-5-272-0818, email: finasc@ccu.edu.tw.

Asia-Pacific Journal of Financial Studies (2015) 44, 635–660 doi:10.1111/ajfs.12102

©2015 Korean Securities Association 635

not exist. Traders can only submit orders with specific stock prices and number of

shares prior to and during the trading session. Daily price fluctuation limits are in

place at 7% of the closing price of the preceding business day for each stock to pro-

tect investors from an excessively volatile market. TWSE also adopts a multiple

tick-size trading mechanism

1

to narrow the bid-ask spread and help with stock

price continuity. However, the literature’s understanding of this emerging market is

much lower than specialist (NYSE/AMEX) and multi-dealer (NASDAQ) markets.

Therefore, this study focuses on the relationship between order aggressiveness, price

impact, and investment performance in a pure order-driven stock market.

Traders generally can fulfill their needs by submitting more aggressive orders or

less aggressive orders in a specific price range in TWSE. For example, a more

aggressive marketable limit order could be defined as orders to buy at or above the

prevailing ask prices or to sell at or below the prevailing bid quotes. Since more

aggressive orders are submitted by traders who demand immediacy, the execution

probability of those orders is more certain than that of less aggressive orders (e.g.,

non-marketable limit orders). By submitting more aggressive limit orders, traders

can set relatively higher buy prices or lower sell prices, but achieve more certainty

of execution.

Stocks are a major asset class widely held by many individuals and institutions

in Taiwan. At the end of 2013, the accumulated number of accounts opened was

16.84 million, translating to 72% of Taiwan’s population (23.37 million).

2

By com-

parison with the United States, less wealthy investors in Taiwan tend to have a

somewhat higher proportion of their total assets invested in the stock market than

do wealthier investors (Polkovnichenko, 2005; Barber et al., 2009). The majority of

participants in TWSE are relatively less wealthy domestic individuals (64% at the

end of 2013), although wealthier institutional investors have progressively played a

more important role over time during the past decade.

Whether aggressive traders can survive and dominate the market is not only an

important issue in financial research, but also in practice. For example, for market

participants, the degree of order aggressiveness could be a proxy for the demand

for immediacy. It is worth examining whether experienced participants tend to

1

The tick sizes (in TWD) range from 0.01 to 5 according to stock price range. For example,

the minimum tick size is 0.01 for stocks with a price equal or larger than 0.01 and less than

5; 0.05 for stocks with a price equal or larger than 5 and less than 10; 0.10 for stocks with a

price equal or larger than 10 and less than 50; 0.50 for stocks with a price equal or larger

than 50 and less than 100; 1.00 for stocks with a price equal or larger than 100 and less than

500; 5 for stocks with a price equal or larger than 1000. In sum, the tick sizes approximately

lie between 2&and 10&of stock prices.

2

Data for the accumulated number of accounts opened are obtained from the website of the

TWSE Corporation; see http://www.twse.com.tw/ch/statistics/statistics_list.php?tm=02&stm=

001. Population data are from the website of Department of Statistics, Ministry of the Inte-

rior; see http://www.moi.gov.tw/stat/english/monthly.asp.

P.-H. Hung et al.

636 ©2015 Korean Securities Association