Order Book Reporting Methods and Their Impact on Some Market Activity Measures

This Data Highlight explores the impact of different order book reporting mechanisms on the interpretation of three common market activity measures: cancel-to-trade ratio, odd lot trade ratio and odd lot volume ratio. To account for the disparate nature of the feeds, we have made some modifications (discussed in detail below) to a number of the exchange-specific metrics published on the Market Structure web site. Details of these changes are also in the Market Activity Methodology document.

Two Order Book Methods

The two dominant formats used by the exchanges to report trade and order activities on their direct feeds are “order-based” and “level-book.” The order-based method prints a message for every displayed quote or order (i.e., orders that are not immediately executable and not denoted as hidden). Each displayed order receives an order identification number (“order id”) that permits the matching of subsequent events, including cancels, modifications, and executions to specific resting orders. To compute the total posted liquidity at any given price point for a given stock, one must keep track of every order, cancel, modification, and execution during the course of the trading day.

In contrast, the level-book method prints a message for every event that impacts the order book at a given price point for each stock, but does not print distinct order messages with their own order ids. The total posted liquidity at any given price point for a given stock is readily ascertained from the most recent level-book message for that price point.

Most exchanges currently use the more granular order-based method for their direct feeds, including NYSE Arca, BATS, Chicago (CHX), Direct Edge, Nasdaq, Nasdaq BX, Nasdaq PSX and National. NYSE and NYSE MKT (Amex) use the level-book method.

Impact on Some Market Activity Measures

In Data Highlight 2013-01, Trade to Order Volume Ratios, we stated that the “order cancellation data series is a simple measure of the number of displayed orders canceled per the number executed, and is mathematically related to the inverse of the trade-to-order volume ratio.” Metrics for both of these data series can be plotted for each exchange using the Data Visualization tool.

Some market participants have observed via the data visualization tool (as well as the downloadable individual time series files) that the cancel-to-trade ratio for NYSE and AMEX computes to a higher level than for most other exchanges, and similarly the trade-to-order volume ratio computes to a lower level than for most other exchanges. Given that the NYSE and AMEX both use the level-book method to report market activity on their direct feeds, we have explored the extent to which this might impact the computation, or interpretation, of these two metrics.

We begin by noting that the trade-to-order volume ratio is based on counting the total number of shares traded on an exchange as a fraction of the total number of shares posted on that exchange during continuous market hours. This computation is therefore not dependent on how many individual messages are used to convey such information, nor whether a single trade for 200 shares is reported as one trade for 200 shares or two trades for 100 shares each. Observed values for these ratios should not be influenced by the method an exchange uses (order-based or level-book) to report its activity.

However, this is not necessarily the case for the cancel-to-trade ratio metric. Consider the appearance of the order book after three orders are added to a new price level: one buy order for 100 shares at $10.00, one buy order for 300 shares at $10.00 and one buy order for 100 shares at $10.00. For feeds using the order-based method, each of these orders will be individually reported as 100, 300, and then 100 shares. For feeds using the level-book method, there will be three separate update messages showing a total of 100, 400, and then 500 shares bid at $10.00. If these three orders are then sequentially canceled, an order-based feed will print three cancel messages, one for each original order with a matching order id. Similarly, a level-based feed will print three messages, but in the form of updates showing 400, 100, and then 0 shares available at $10.00. In either format, there are a total of three messages printed as a result of the cancels.

But suppose that instead of the orders being canceled, they are executed as a result of an incoming market order for 500 shares. Direct feeds using the order-based mechanism will report three distinct trades, of 100, 300, and 100 shares each, with three unique order ids tied to the original resting orders. But the level-book feed will report only one trade for the total 500 shares. This example demonstrates how the same 500-share market order yields a different trade count depending on whether the direct feed uses the order-based or level-book approach. As such, the cancel-to-trade ratio computed for the level-book feeds can differ due to any marketable order that interacts with multiple resting orders at the same price point, and are therefore reported as a single trade message.

Because of the differences in these reporting methods, it may be inappropriate to directly compare or aggregate the cancel-to-trade ratio metrics derived from level-book feeds versus order-based feeds. Since most exchanges currently utilize the order-based method, to avoid mixing data derived from different reporting methods, we will temporarily exclude NYSE and Amex data in computations of the aggregate cancel-to-trade ratio statistic. We have also updated prior computations of this metric to correct for this exclusion.

The chart below shows the impact of removing Amex and NYSE message counts from the aggregate cancel-to-trade measure.