Microstructure of trading systems and exchange rate stability


If the standard type of limit order is not specified, the application shall be considered an application of the "put in place." Just SELT distinguishes five kinds of standard applications, "to remove the residue," "queued", "immediately or reject," "conceal the number of" off-system and the conclusion of the transaction.

As already mentioned, a feature limited order is a condition for its implementation - it is performed only when the price equal to the market price. However, since this may not happen, limited orders execution uncertainty inherent risk (uncertainty risk). While the market order is executed with the unambiguous definition, limited warrant expect price changes to become active.

In SELT unexecuted limit orders are placed in a queue, which is not before the auction. First in line to buy an application with a maximum price, then - in descending order of price. In the queue for the first sale of a bid with the lowest price, and then in ascending order of price. At prices equal to the same directional applications have priority application filed earlier. In other trading systems, the role of the queue performs registration book orders.

If market orders are set by traders with the latest update of the information upon which operations are conducted, the limited order does not respond to current information, waiting for the "wings." As a result, it is likely that they will be executed at the wrong price (mispriced order). Statistics warrants MICEX closed, so we use international data on transactions in currency markets. Observations show that the decision as to which order set - limited or market - depends on the level of the current volatility in the market. Market volatility traders will exhibit limited orders and increase the spread between buying and selling rates. In turn, the increase in the spread increases the indirect costs of trading by market orders. There is a recursive relationship: the volatile market forces to resort to limited orders, they make use of unfavorable market orders, which encourages further use of limited orders.

However, growth in the share of limit orders in the total amount of applications only increases the likelihood of false pricing and lead to a situation in which several large market orders, can change the prices so that the uncertainty of the execution limit orders are increasing. There is a spiral effect of destabilization when the volatile market has reversible support.

At first glance it may seem that the currency exchanges is to prohibit or restrict the use of limited orders, which stimulate the growth of the volatility of the exchange rate. However, this conclusion is incorrect for several reasons. First, limit the use of limited orders will reduce the flexibility of trading strategies, traders, and it is unknown how this will affect their behavior. Second, the market will then be less competitive compared to other trading systems, primarily OTC. Third and finally, as we shall see later, during the currency crisis traders themselves refuse "dangerous" limited orders in favor of the market.