1. 1 Transparency, Information Content and Order Placement Strategy Tai Ma, Yaling Lin, Hsiu-Kuei Cheng Department of Finance, National Sun Yat-sen University

2. 2 Introduction  Increasing pre-trade transparency in Taiwan Stock Exchange Before July 1st, 2002: only the best price is disclosed.  Since July 1st, 2002: the volume of best bid/ask is disclosed additionally. Beginning in 2003: both the price and volume of the best five unexecuted orders are disclosed

3. 3 Introduction  How much additional information is valuable after grater transparency?  How does additional information influence order strategies of individual and institutional investors?

4. 4 Related Research  Traders’ choices between market and limit orders limit orders are not as informative as market orders [e.g., Glosten, 1994 ； Angel, 1994 ； Rock, 1996 ； Harris, 1998 ]. informed traders would prefer to submit limit orders rather than market orders [e.g., Bloomfield, O’hara and Saar （ 2005 ） and Kaniel and Liu （ 2006 ） ].

5. 5 Related Research  LOB information affects traders’ behavior the state of LOB will influences the forthcoming order flow [e.g., Handa and Schwartz （ 1996 ）, Parlour （ 1998 ） and Foucault （ 1999 ）, Coppejans and Domowitz (2002), Biais et al. （ 1995 ）， Griffiths et al. （ 2000 ）， Hollifield et al. （ 2003 ）, and Ranaldo (2004) ]. the impact of LOB information beyond it’s first step on investors’ strategies [e.g., Cao, Hansh and Wang (2003) and Pascual and Veredas (2003) ].

6. 6 Related Research  Comment: none of these studies has measured the information content of the book beyond its first step for different types of investors.They do not connect the information content and order placement strategy with transparency enhancement.

7. 7 Contribution  The first one to combine the issues of LOB information content, investors’ order strategies and transparency.  Exploring information content of the best quote and the quote beyond the best for different kinds of traders.  Investigating the transparency impact on different types of traders’ order placement strategies.

8. 8 Sample Period  1 st stage : least transparent : Feb-02 、 Jun-02  2 nd stage : partially transparent :Jul-02 、 Dec-02  3 rd stage : most transparent : Mar-03 、 Jun-03

9. 9 Samples and subsamples  50 stocks listed in the Taiwan Stock Exchange. buyerseller informed group1group2 uninformedgroup3gruop4

10. 10 Samples and sub-samples  Time Series for Analysis (Information content) : In the second stage In the third stage

11. 11 Methodology  Information share of LOB  VAR (vector autoregressive model)  Partial transparent period: 1 、 model1 2 、 model2 model1 model2  The most transparent period 1 、 model3 2 、 model4 model3 model4

12. 12 The Information content of LOB  Vector Autoregressive Model Information content: the percentage of variation in trading prices (volume) due to posted bid/ask price (bid/ask volume). Model 1 ( 2 nd stage ) (back)(back)

13. 13 The Information content of limit order book Model 2 ( 2 nd stage ) (back)(back)

14. 14 The Information content of limit order book Model 3 ( 3 rd stage ) (back)(back)

15. 15 The Information content of limit order book Model 4 ( 3 rd stage ) (back)(back)

16. 16 Methodology  Order Strategies: (aggressiveness of buyers)  C1: bid price = maximum price limit  C2: best ask < bid price < maximum price limit  C3: best bid < bid price <= best ask  C4: bid price = best bid  C5: best bid minus two ticks <= bid price < best bid  C6: minimum price limit <= bid price < best bid minus two ticks

17. 17 Methodology  Order Strategies: (aggressiveness of sellers)  C1: ask price = minimum price limit  C2: minimum price limit < ask price < best bid  C3: best bid <= ask price < best ask  C4: ask price = best ask  C5: best ask < ask price <= best ask add two ticks  C6: best ask add two ticks < ask price <= maximum price limit

18. 18 Methodology  Order Probit Model  Aggressiveness index: (C1 to C6)  Explanatory variables: LOB first step information:  DS1 （ DO1 ） :The best quote depth on the same （ opposite ） side LOB information beyond the first step:  DS25(DO25): The accumulative quote depth from step2 to step5 on the same （ opposite ） side.  LS12(LO12):The distance between the best and second best quote on the same （ opposite ） side.  LS25(LO25):The distance between the second and fifth best quoteon on the same （ opposite ） side.. Other control variables:  one-lagged order aggressiveness  Margin trading  spread

19. 19 Empirical Results 1.Information contents 1.1Summary Statistics for Information share Disclosing bid price and volume have more information content than ask price and volume, especially in the most transparent period. Table 2 Table 2 (stage 2) Table 3 (stage 3)Table 3

20. 20 Empirical Results (BACK) 1.2Test results of information content In the partial transparent market, the best quote price has more information content than the best quote volume when we decompose the trading price. Table4 (stage 2)Table4 Institutional traders’ unmatched orders provide more information content than individual traders. Table4 (stage 2)Table4 Table5(stage 3)Table5

21. 21 Empirical Results The best quote price and the average step2 to step5 quote price Individual trader’s best bid/ask of unexecuted orders always has more information content than the average of step2 to step5 quote price Table5Table5 Institutional investor’s average of step2 to step5 quote price contains the same information as the best unexecuted orders at least. Table5Table5

22. 22 Empirical Results 2Orderplacement strategies 2.1Summary Statistics for Orderplacement strategies orders are distributed evenly among all aggressive categories except the sub- aggressive category （ C2 ） Table6Table6

23. 23 Empirical Results 2.2 Transparency and orderplacement strategies  stage 1 into stage 2 or 3: both institutional and individual investors reduce the most aggressive orders （ C1 ）, and C3 as well as C4 increase instead.  stage 2 into stage 3 : the increasing tendency in C3 is more striking for institutional investors’ buy orders. Table7

24. 24 Empirical Results 2.3 Probit model: the determinants of order aggressiveness.  the order aggressiveness of all sub-samples performs significant positive first-order autocorrelation.  The sign of the margin trading dummy is positive,especially for individual traders  When the spread widens, the order aggressiveness will decline, especially for individual traders and sell orders. Table8 Table9Table8 Table9

25. 25 Empirical Results 2.3 Probit model: the determinants of order aggressiveness.  The order submission depends mostly on the best quote and corresponding depth, the disclosures beyond step 1 still have explanatory power. Quote depth  The aggressiveness is positive （ negative ） with the book depth on the same （ opposite ） side.This trend is more evident for the best quote than the quote beyond the first.  The accumulated depth at step2 to 5 has more significant effect on individual strategies.  The aggressiveness of buyers is affected more by opposite-side depth, while the sellers are more concerned about the same side depth Table8 Table8 Table9Table9

26. 26 Empirical Results 2.3 Probit model: the determinants of order aggressiveness. Quote price  Investors become more aggressive with smaller quote distance on the same side or with larger quote distance on the opposite side.  This trend is more evident for the best quote than the step2 to step5 quote price, institutional buy orders are only exception.  Order submissions are affected by the quote distance of the same side rather than the opposite side.

27. 27 Conclusion --Informaiton content  The LOB information content of buy orders is more than that of sell orders.  the quote price is more informative than the quote volume.  Institutional traders ’ unmatched orders provide more information content than individual traders.

28. 28 Conclusion --Informaiton content  the individual traders’ best quote always has more information content than the average 2 nd to 5 th quote, while it is not true for institutional investors.

29. 29 Conclusion —Order placement strategy  Higher transparency makes all investors reduce unnecessarily costly orders.  The competition among institutional traders is stronger than individual traders as transparency increases.  Investors not only utilize the best quote and depth to make decisions but also use the information beyond step 1 of the book.

30. 30 Conclusion —Order placement strategy  Investors are more aggressive as the same side of the book is more crowded and the opposite side of the book is more disperse.  the depth of limit order book has quite diversified effects on order submission for the buyers, sellers, institutional and individual investors.

31. 31 Table 2 Summary Statistics for Information share in the partially transparent market (stage 2) (BACK)(BACK) The number in the cell is the percentage of information share. We list the results for buy and sell orders separately. Investors are classified into informed (institutional) and uninformed （ individual ） traders. Moreover, "bid1" is the best bid, "bidq1" is the volume of best bid, "ask1" is the best ask and "askq1" is the volume of best ask.

32. 32 Table 3 Summary Statistics for Information share in the most transparent market (stage 3) (BACK)(BACK) "bid1" is the best bid, "bid25" is the average of step 2 to step 5 bid price, "bidq1" is the volume of best bid, "bidq25" is the average of step 2 to step 5 bid volume, "ask1" is the best ask, "ask25" is the average of step 2 to step 5 ask price, "askq1" is the volume of best ask and "askq25" is the average of step 2 to step 5 ask volume.

33. 33 Table 4 Difference in the information share of trading price and volume in the partial transparent market (stage 2) (BACK)(BACK)

34. 34 Table 5 Difference in the information share of trading price and volume in the most transparent market (stage 3) (BACK1 ) (BACk2) (BACK1 ) (BACk2)

35. 35 Table 6 Distribution of order types by institutional and individual investors BACK BACK

36. 36 Table 7 Differences in order aggressiveness between stages of various transparency levels BackBack

37. 37 Table 8 Ordered Probit Model of Order Choice for Institutional Investors Back1 Back2BackBack2

38. 38 Table 9 Order Probit Model of Order Choice for Individual Investors Back1 Bacl2BackBacl2