## in)stability properties of limit order dynamics (2006)

Venue: | In Proceedings of the ACM Conference on Electronic Commerce |

Citations: | 8 - 0 self |

### BibTeX

@INPROCEEDINGS{Even-dar06in)stabilityproperties,

author = {Eyal Even-dar and Sham M. Kakade and Michael Kearns and Yishay Mansour},

title = {in)stability properties of limit order dynamics},

booktitle = {In Proceedings of the ACM Conference on Electronic Commerce},

year = {2006}

}

### OpenURL

### Abstract

We study the stability properties of the dynamics of the standard continuous limit-order mechanism that is used in modern equity markets. We ask whether such mechanisms are susceptible to “butterfly effects ” — the infliction of large changes on common measures of market activity by only small perturbations of the order sequence. We show that the answer depends strongly on whether the market consists of “absolute ” traders (who determine their prices independent of the current order book state) or “relative ” traders (who determine their prices relative to the current bid and ask). We prove that while the absolute model enjoys provably strong stability properties, the relative model is vulnerable to great instability. Our theoretical results are supported by large-scale experiments using limit order data from INET, a large electronic exchange for NASDAQ stocks. 1.

### Citations

98 | Optimal control of execution costs
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(Show Context)
Citation Context ...analysis for one-way and volume-weighted average price (VWAP) trading. Some recent papers have applied reinforcement learning methods to trade execution using order book properties as state variables =-=[1, 5, 9]-=-. 3. MICROSTRUCTURE PRELIMINARIES The following expository background material is adapted from [8]. The market mechanism we examine in this paper is driven by the simple and standard concept of a limi... |

44 | Statistical properties of stock order books: empirical results and models
- Bouchaud, Mézard, et al.
(Show Context)
Citation Context ...operties of limit order books, and attempts to establish the informational value of order books [4]. A good overview of the empirical work can be found in[6]. Of particular note for our interests is =-=[3]-=-, which empirically studies the distribution of arriving limit order prices in several prominent markets. This work takes a view of arriving prices analogous to our relative model, and establishes a p... |

25 |
Market microstructure: A survey of microfoundations, empirical results, and policy implications
- BIAIS, GLOSTEN, et al.
- 2005
(Show Context)
Citation Context ...indings predict negative price impacts for large trades, and price effects for large inventory holdings by market-makers. An excellent and comprehensive survey of results in this area can be found in =-=[2]-=-. There is a similarly large body of empirical work on microstructure. Major themes include the measurement of price impacts, statistical properties of limit order books, and attempts to establish the... |

16 | The informational content of an open limit order book
- Cao, Hansch, et al.
- 2004
(Show Context)
Citation Context ... empirical work on microstructure. Major themes include the measurement of price impacts, statistical properties of limit order books, and attempts to establish the informational value of order books =-=[4]-=-. A good overview of the empirical work can be found in[6]. Of particular note for our interests is [3], which empirically studies the distribution of arriving limit order prices in several prominent... |

12 |
Competitive algorithms for vwap and limit order trading
- Kakade, Kearns, et al.
- 2004
(Show Context)
Citation Context ... shares quickly, but still at a discount to placing a market order, will deliberately position their order just above the current bid. More generally, the entire area of modern execution optimization =-=[8, 9, 7]-=- has come to rely heavily on the careful positioning of limit orders relative to the current order book state. Note that such positioning may depend on more complex features of the order books than ju... |

6 |
Empirical market microstructure: economic and statistical perspectives on the dynamics of trade in securities markets, forthcoming from Oxford
- Hasbrouck
- 2004
(Show Context)
Citation Context ... measurement of price impacts, statistical properties of limit order books, and attempts to establish the informational value of order books [4]. A good overview of the empirical work can be found in=-=[6]-=-. Of particular note for our interests is [3], which empirically studies the distribution of arriving limit order prices in several prominent markets. This work takes a view of arriving prices analogo... |

4 |
Optimal Trading Strategies. Amacom
- Kissell, Glantz
- 2003
(Show Context)
Citation Context ... shares quickly, but still at a discount to placing a market order, will deliberately position their order just above the current bid. More generally, the entire area of modern execution optimization =-=[8, 9, 7]-=- has come to rely heavily on the careful positioning of limit orders relative to the current order book state. Note that such positioning may depend on more complex features of the order books than ju... |

3 | Optimal trade execution of equities in a limit order market
- Coggins, Blazejewski, et al.
- 2003
(Show Context)
Citation Context ...analysis for one-way and volume-weighted average price (VWAP) trading. Some recent papers have applied reinforcement learning methods to trade execution using order book properties as state variables =-=[1, 5, 9]-=-. 3. MICROSTRUCTURE PRELIMINARIES The following expository background material is adapted from [8]. The market mechanism we examine in this paper is driven by the simple and standard concept of a limi... |

1 |
Reinforcement learning for optimized trade execution. Preprint. Preliminary version presented at
- Nevmyvaka, Kearns
- 2005
(Show Context)
Citation Context ... shares quickly, but still at a discount to placing a market order, will deliberately position their order just above the current bid. More generally, the entire area of modern execution optimization =-=[8, 9, 7]-=- has come to rely heavily on the careful positioning of limit orders relative to the current order book state. Note that such positioning may depend on more complex features of the order books than ju... |