Intraday order transition dynamics in high, medium, and low market cap stocks: A Markov chain approach

TL;DR

This paper uses a Markov chain model to analyze intraday order transition dynamics across stocks of different market caps, revealing patterns in order types, modifications, and timing that vary throughout the trading day.

Contribution

It introduces a first-order Markov chain approach to compare order transition dynamics across market cap categories and time zones within high-frequency NASDAQ data.

Findings

Limit orders show higher inertia during opening hours.

Order transition behaviors differ across market cap categories.

Order transition patterns cluster except during opening and closing hours.

Abstract

An empirical stochastic analysis of high-frequency, tick-by-tick order data of NASDAQ100 listed stocks is conducted using a first-order discrete-time Markov chain model to explore intraday order transition dynamics. This analysis focuses on three market cap categories: High, Medium, and Low. Time-homogeneous transition probability matrices are estimated and compared across time-zones and market cap categories, and we found that limit orders exhibit higher degree of inertia (DoI), i.e., the probability of placing consecutive limit order is higher, during the opening hour. However, in the subsequent hour, the DoI of limit order decreases, while that of market order increases. Limit order adjustments via additions and deletions of limit orders increases significantly after the opening hour. All the order transitions then stabilize during mid-hours. As the closing hour approaches, consecutive order executions surge, with decreased placement of buy and sell limit orders following sell and buy executions, respectively. In terms of the differences in order transitions between stocks of different market cap, DoI of orders is stronger in high and medium market cap stocks. On the other hand, lower market cap stocks show a higher probability of limit order modifications and greater likelihood of submitting sell/buy limit orders after buy/sell executions. Further, order transitions are clustered across all stocks, except during opening and closing hours. The findings of this study may be useful in understanding intraday order placement dynamics across stocks of varying market cap, thus aiding market participants in making informed order placements at different times of trading hour.