An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse

The authors analyse tâtonnement in the Paris Bourse by studying the dynamics of order placement and indicative process during the preopening period, which precedes the opening call auction. Consistent with the theoretical analysis in Vives (1995), preopening prices have information content about the future value of the stock. An econometric approach is proposed, based on the theoretical of Vives (1995), to measure the speed of this learning. In contrast with Vives (1995), the order flow does not decrease as the market progressively learns the equilibrium, rather it accelerates towards the end of the preopening. The paper presents a simple model of information tâtonnement predicating such an acceleration. Other findings broadly consistent with strategic order placement are that larger orders (which require more strategic behaviour since they are more likely to affect price) are placed later in the preopening period, are more likely to be hidden, are placed at less aggressive price levels, and are more likely to be modified during the preopening period.