Department of Banking and Finance, Tamkang University;College of Management, Taiwan Normal University;Department of Finance, Xiamen University
This paper explores the relationship between orders and performance in the Taiwan futures market and aims to predict the futures price change using the order aggressiveness and information content in the limit order book. The results show that the performance of market orders of TAIEX futures is significantly positive, indicating that the market orders contain information. The five quotes of the limit order book can predict the change in futures prices, especially when there is an uptrend in the market. The predictability of the change in futures prices also increases when the imbalance in the price impact between the demand and supply schedules is extreme. We also use the five quotes of the limit order book to propose a trading strategy. This trading strategy could earn positive returns even when transaction costs are taken into account.