Order Choices, Order Execution Quality and Trading Volume: Evidence from Reductions in the Call Auction Interval

Abstract

From 2013 to 2015, the Taiwan Stock Exchange (TWSE) first reduced the call auction interval from 20s to 15s (hereafter denoted as Reform I), and then from 10s to 5s (hereafter denoted as Reform II), providing natural experiments to test the direct impact on order choices, order execution quality and trading volume. The present study provides evidence that the “time contraction” effect causes the decrease in the number of order submissions and cancellations. We find that with more frequent auctions, institutional investors raise order aggressiveness because of their higher demand for immediacy and tend to engage more in order splitting particularly when the auction interval is reduced to 5s. We also find that for individual investors who symbolize the uninformed traders having lower demand for immediacy and incurring higher monitoring cost, the “wait-and-see” effect becomes dominant in Reform II and lowers their order aggressiveness in large cap stocks. Although the direction of changes in the trade-to-auction ratio remains unclear, we show that the probability of limit-order execution of individual investors becomes lower in large cap stocks, and the comprehensive risk of limit-orders becomes smaller subsequent to Reform II. Following Reform I, the trade value of heavily traded stocks increases by 10.57%. After Reform II, the increase in percentage of trade value attributable to institutional investors is about 1.56%.