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This paper aims to examine the impact of a reduction in tick size on the information content of the order book by using data from the Taiwan Stock Exchange (TWSE).

To estimate the information content of the order book, the modified information share proposed by Hasbrouck and extended by Lien and Shrestha is used in this paper.

The empirical results show that the limit order book is informative. Furthermore, the results indicate that a reduction in tick size will decrease the information content of the order book and the decrease in the information content of the order book is positively related to the thinner order book.

This paper suggests that, in order to enhance the information content of the order book, the TWSE should disclose the full limit order book.

This study aims to provide a systematic literature review of the research study in the area of limit order book (LOB) mechanism of trading and its implications for market efficiency. The study attempts to document the recent theoretical developments and empirical findings from the literature exhaustively and identifies the research gaps for future research.

The study uses seven reputable databases to select 2,514 research studies spanning over 1981-2018 (finally compressed to a pool of 103 articles, based on relevance and impact). The study uses bibliometric network visualization and text analytics to categorize and examine the literature. The chosen articles are compiled and analyzed to provide a comprehensive account of the current research on LOBs.

The recent LOB literature is summarized on various criteria as follows: sub-areas, the types of economies and markets, methodologies and the LOB measures. The review identifies a dearth of studies on the LOBs in emerging markets. It suggests the potential research areas as intraday studies in emerging LOB markets; application of market indicators based on deeper levels of LOB, beyond the best prices; market fragmentation, order routing decision and its impact on order execution quality; optimal display of LOB levels; liquidity dynamics in quote-driven markets vis-à-vis LOB markets; effect of high-frequency trading on market microstructure; application of advanced techniques (e.g. machine learning models, zero-intelligent models); relationship between the trading speed, order aggressiveness, shape and resilience of the order book and informed trading; and information content of the auxiliary order submission strategies, including cancellation, amendments and hidden orders.

For the past 15 years, to the best of the knowledge, a comprehensive review of the literature on LOBs has not been published. The financial markets have transformed significantly over this period, driven by the adoption of LOBs, low latency trading and technological advancements in information dissemination. This article provides an extensive collection and classification of the literature on LOBs. This would be useful for the practitioners, future researchers and academics in the area of financial markets.

Algorithmic trading attempts to reduce trading costs by selecting optimal trade execution and scheduling algorithms. Whilst many common approaches only consider the bid-ask spread when measuring market impact, the authors aim to analyse the detailed limit order book data, which has more informational content.

Using data from the London Stock Exchange's electronic SETS platform, the authors transform limit order book compositions into volume-weighted average price curves and accordingly estimate market impact. The regression coefficients of these curves are estimated, and their intraday patterns are revealed using a nonparametric kernel regression model.

The authors find that market impact is nonlinear, time-varying, and asymmetric. Inferences drawn from marginal probabilities regarding Granger-causality do not show a significant impact of slope coefficients on the opposite side of the limit order book, thus implying that each side of the market is simultaneously rather than sequentially influenced by prevailing market conditions.

Results show that intraday seasonality patterns of liquidity may be exploited through trade scheduling algorithms in an attempt to minimise the trading costs associated with large institutional trades.

The use of the detailed limit order book to reveal intraday patterns in liquidity provision offers better insight into the interactions of market participants. Such valuable information cannot be fully recovered from the traditional transaction data-based approaches.

This study aims to investigate – theoretically and empirically – if call auctions incorporate asymmetric information into prices.

First, this study introduces a new model of price formation in a call auction with insider information. In this call auction model, insider trading gives rise to an asymmetric information component of transaction costs. Next, this study estimates the model using 20 stocks from Euronext Paris and investigates if the asymmetric information component is present.

The theoretical analysis reveals that call auctions incorporate asymmetric information into prices. The empirical analysis finds strong evidence for the asymmetric information component. Testable implications provide further support for the model.

Call auctions have recently been proposed as an alternative to continuous limit order book markets to overcome problems associated with high-frequency trading. However, it is still an open question whether call auctions efficiently aggregate asymmetric information. The findings of this study imply that call auctions facilitate price discovery and, therefore, are a viable alternative to continuous limit order book markets.

There is no generally accepted measure of trading costs for call auctions. Therefore, the measure introduced in this study is of great value to anyone who wants to quantify trading costs in call auctions, understand the determinants of trading costs in call auctions or compare trading costs and their components between continuous markets and call auctions. This study also contributes to the literature devoted to estimating the probability of information-based trading.

The paper aims to investigate order-based manipulation that consists of order-placing strategies.

Using the bid and ask record provided by Hong Kong Exchanges and Clearing Limited, a Level II dataset, the paper develops a methodology to obtain cancelled orders during regular trading hours. The paper examines the cancelled orders and potential order-based manipulation activities, as well as the corresponding behavior of different groups of stocks.

Empirical results show that the relationship between order cancellation and order-based manipulation is strong and deserves more attention.

The methodology can also be used by regulators and authorities to monitor suspicious activities in the market. This paper also suggests that analysis on high-frequency data does improve the understanding of trading activities in the stock market.

This paper assesses the informational contents of open electronic limit order book in KOSPI 200 index futures market spanning sample period from December 2004 to November 2005 with a particular focus on the incremental information contained in the limit orders behind the best bid and offer. Using Vector Error Correction Method to estimate ‘Information share’ of quotes as suggested by Hasbrouck (1995), we find that the order book is significantly informative–its contribution to price discovery is approximately above 70%, while remaining is from cash price. Furthermore, we find the limit orders from step 2 to 5 is more informative than the best bid and offer in price discovery process, based on the estimation of information share. This empirical finding sharply contradicts the evidence suggested by previous literature that the best quotes contribute the most to price discovery and the contribution of order book the beyond the best bid and offer is marginally additional in cash market. Summarizing overall empirical evidence, limit order book in KOSPI 200 index futures market plays a differential role in contrast with stock markets.

The purpose of this paper is two-fold: first, to introduce an innovative model of financial order book, less simplified than the existing literature and still able to replicate all statistical features of true markets; second, to simulate realistically the effects of policies aimed to reduce the instability of financial markets.

The paper is based on an agent-based model and the applied methodology is the computational simulation.

The policymaker can actively reduce the instability of financial market by means of policies aimed to increase the heterogeneity of investors, both in terms of the behavioral attitude for market participation and of the differentiation of opinions; favor investors who show insensibility with regard to market information; limit the allowed number of counterparts for any market order; reduce the time validity of orders; and maintain flexibility and efficient bargaining, reduce transaction costs and avoid Tobin taxes.

In future research, an opinion dynamics engine within a clustered community network will be embedded.

Indeed, the obtained results are policy rules which could be immediately applied.

The order book model contained in the paper is completely new, innovative and original. Innovativeness is based on a reduced number of simplifying assumptions. The realism of the presented mechanism is higher than in other existing models. The value of the model is high because of several factors. From the scientific point of view, it constitutes the reliable framework on which many other papers will be based: it is the core center of future research. From the policymaker’s point of view, it represents a credible tool for policy hypotheses testing.

The purpose of this paper is to critically evaluate the different market‐making systems found in most developed capital markets and to provide guidance to emerging market regulators for a possible implementation of such a system.

The paper looks closely at the market design of seven developed countries focusing on the obligations and privileges of market makers. Through a case study and empirical evidence the paper identifies advantage and disadvantage of a possible implementation of a similar design to an emerging market.

The paper identifies three forms of market making applied today: the quote‐driven, the centralized and non‐centralized systems. Four factors are proposed that regulatory authorities in emerging markets should consider when deciding whether, and which of, the three market‐making systems they should implement. These are: current exchange design and the costs of restructuring, international and domestic investors' sentiment towards the exchange, size of the emerging market and the market designs in countries hosting the target foreign capital.

The paper looks at the implementation of a market‐making system in an emerging market. Further research may investigate other ways of how emerging markets authorities can restructure their markets into more efficient, compatible and trustworthy financial venues in order to attract both domestic and foreign investors.

The area of emerging markets' microstructure design and market quality is still relatively under‐studied. We provide evidence of the challenges and benefits of the implementation of a market‐making system in those markets.

The purpose of this paper is to examine the order strategies of investors, in particular their use of intermarket sweep orders (ISOs), in response to a short‐lived information event.

This paper uses a natural experiment on September 8, 2008, in which a 2002 bankruptcy story of United Airlines erroneously reappears through Bloomberg terminals and cause significant price changes on the stock. The authors first provide the background information of this natural experiment and use bootstrapping methods and regression analyses to examine investors' use of intermarket sweep orders.

The results show that investors use intermarket sweep orders, a unique type of liquidity‐demanding limit orders, in attempts to exploit their short‐lived information. In particular, those investors show aggressiveness not only in trade speed but also in trade size. These findings support the hypothesis that investors with short‐lived information demand immediacy to conserve the value of their information.

The results suggest that investors on the demand side of liquidity dynamically trade off the potential adverse impact of trade‐throughs with the speed their trades are executed. How limit order traders on the supply side or liquidity suppliers in general adjust to the demand‐side dynamics remains a future research direction.

This paper highlights the fragility of information transmission in financial markets and suggests that the use of intermarket sweep orders could possibly magnify the impacts of erroneous information.

Using a natural experiment, this paper provides the first piece of empirical evidence on the use of intermarket sweep orders when investors possess short‐lived information.

How is liquidity formed in emerging financial markets? Do traders preannounce their orders to attract outside liquidity providers (a practice referred to as sunshine trading)? The purpose of this paper is to study liquidity formation of infrequently traded stocks. It also investigates the role of preopening periods in the formation of liquidity.

The paper focuses on the eight largest stocks traded on the West African Bourse in 2000. The dataset includes all the orders submitted to the market from January 3 to December 13, including their time of placement, limit price, and proposed quantity, and the identity of the broker‐dealers who submitted them. The paper analyzes order placement strategies as well as preopening price efficiency and broker‐dealers' profits.

The evidence is consistent with broker‐dealers engaging in sunshine trading. First, large orders are placed early during the preopening period and are not cancelled. Second, for most of the stocks in our sample, preopening prices reveal information long before trading actually occurs. Third, large volumes are traded without significant price movements. Fourth, the most active brokers' profits are lower than less significant intermediaries' ones, indicating that the former do not manipulate the market.

The analysis suggests that the actual liquidity on the West African Bourse is higher than what is indicated by the average state of the order book. This might increase the attractiveness of African stock markets for global portfolio managers.

To the best of the authors' knowledge, this paper is the first to empirically study sunshine trading as theoretically analyzed by Admati and Pfleiderer.