Electronic limit order books during uncertain times: Evidence from Eurodollar futures in 2007

This paper examines how order submissions to the electronic limit order book for Eurodollar futures were affected when financial market turmoil generated a dramatic rise in interest rate uncertainty on August 9, 2007. We show that overall depth declined and that the shape of the order book moved away from best prices. We empirically model the decision to add or subtract depth to the order book and demonstrate that prior to August 9, both order placements and order cancellations tended to rapidly restore symmetry to the electronic limit order book. Following August 9, the relationship between the size and shape of the limit order book and incoming orders became muted whereas the responsiveness of order book updates to recent trading becomes enhanced. These results suggest that increased uncertainty changed the behavior of high-frequency (algorithmic) traders in this market in ways that reflected their reduced willingness to maintain standing orders in the order book.