Large large-trader activity weakens the long memory of limit order markets

TL;DR

This study analyzes how large investment fund activities influence the long-term memory of order signs in limit order markets, revealing that increased large fund participation weakens this memory, primarily due to more active meta-orders.

Contribution

It provides empirical evidence linking large fund activity to the weakening of long memory in order signs and identifies active meta-orders as a key factor.

Findings

Large fund trading reduces the long memory of order signs.

More active meta-orders are associated with weaker order sign memory.

Empirical data supports the role of meta-order activity in market dynamics.

Abstract

Using more than 6.7 billions of trades, we explore how the tick-by-tick dynamics of limit order books depends on the aggregate actions of large investment funds on a much larger (quarterly) timescale. In particular, we find that the well-established long memory of market order signs is markedly weaker when large investment funds trade either in a directional way and even weaker when their aggregate participation ratio is large. Conversely, we investigate to what respect a weaker memory of market order signs predicts that an asset is being actively traded by large funds. Theoretical arguments suggest two simple mechanisms that contribute to the observed effect: a larger number of active meta-orders and a modification of the distribution of size of meta-orders. Empirical evidence suggests that the number of active meta-orders is the most important contributor to the loss of market order sign memory.