Abstract
This essay investigates the dynamics of the order flow in a limit order book. In contrast to previous studies, our data set from the Helsinki Stock Exchange encompasses the entire order book structure, including the dealer identities. This enables us to focus on the order behavior of individual dealers. We classify the events in the order book and study the structure of subsequent events using contingency tables. In specific, the structure of subsequent events initiated by the same dealer is compared to the overall event structure. We find that order splitting is more frequent than order imitation. Furthermore, if the spread increases as a result of a trade, other dealers quickly restore the spread, by submitting new limit orders. One conclusion is therefore that there exists a body of potential limit orders outside the formal limit order book and that there is a high degree of resiliency in our limit order book market. As a logical consequence, a large dealer strategically splits his order, in order for the market to supply additional liquidity. One interpretation of our results is that a limit order book market can accommodate larger orders than is first apparent by the outstanding limit orders. Another interpretation is that a limit order book structure gives room for informed traders to successively trade on their information. A third interpretation is that prices only slowly incorporate new information.