DOI: 10.1111/fima.12298 ORIGINAL ARTICLE Fast and slow cancellations and trader behavior Thomas H. McInish 1 Olena Nikolsko-Rzhevska 2 Alex Nikolsko-Rzhevskyy 3 Irina Panovska 4 1 Fogelman College of Business and Economics, University of Memphis, Memphis, Tennessee 2 Department of Finance, Lehigh University, Bethlehem, Pennsylvania 3 Department of Economics, Lehigh University, Bethlehem, Pennsylvania 4 Department of Economics, University of Texas at Dallas, Richardson, Texas Correspondence Olena Nikolsko-Rzhevska, Lehigh University, 621 Taylor St., Bethlehem, PA 18015. Email: olena.rzhevska@gmail.com Funding information Lehigh University, Grant/Award Number: FRG2017 Abstract We investigate how short-lived liquidity supply due to order cancel- lations affects the order-placement behavior of slow traders. When order cancellations increase, slow traders submit fewer and less aggressive orders. Both short- and long-lived liquidity supply have positive effects on the market overall, reducing spreads and increas- ing depth. We conclude that it is not necessary to require limit orders to have a minimum lifespan. We develop econometric and machine- learning frameworks that allow traders to predict whether a quote is likely to have a short or long life, increasing the ability of slow traders to respond strategically to changing order flow. KEYWORDS order cancellations, liquidity provision, machine learning, algorith- mic trading 1 INTRODUCTION In the past decade, changes in market regulations and advancements in trading technology have dramatically reshaped liquidity provision and execution strategies in modern markets. While more liquidity is being supplied, order cancella- tion rates have increased from 5% of all orders in 1990 (Yeo, 2005) to 9% in 1994–1995 (Lo, MacKinlay, & Zhang, 2002) and to more than 94% in our 2018 data with approximately half of the quotes lasting less than half a second. 1 The dra- matic increase in the short-lived liquidity supply and cancellation rates has prompted concerns that displayed liquidity is cancelled before institutional traders can trade against it (Angel, 2014; CFA Institute, 2015; Economist, 2016; Hope, 2013; SEC, 2010). Frequent placement and almost instantaneous cancellations of limit orders are associated with the presence of high-frequency quoters (HFQers). In 1994–1995, when there were few HFQers, Lo et al. (2002) report that 91% of orders were fully or partially executed. 2 If, due to the rapid cancellation of orders, market participants, discouraged by their inability to predict cancellations, pull out of the market, submit fewer orders, or post less aggressive orders, this reduction in liquidity may harm market quality. Unlike most previous work, Rosu (2009) develops a model in which c  2019 Financial Management Association International 1 We calculate order duration from our sample. 2 In the Supporting Information, Table A1, we present a table similar to Table 1 in Lo, MacKinlay, and Zhang (2002). Financial Management. 2019;1–24. wileyonlinelibrary.com/journal/fima 1