Market Influence and Order Book Strategies

Abstract

I review in this paper¹ my findings on order driven market modeling. Following my previous works on robust agents based modeling in finance [1–3,5], I study specific characteristics of order book markets. By controlling the descriptive time scale of the dynamics involved, I show how market impact, linear by definition, and trading strategies lead to precise pictures for clarifying order book dynamics, consistent with what is observed empirically. I then discuss more specifically the role of market impact in the created dynamics and structure of the book and the economic implications of my studies.

The article is organized as follows. In Sect. 1, I describe financial market dynamics in an agent-based market model that clarifies the role of volatility in characteristics observed on a wide range of descriptive time scales. I define in Sect. 2 the limit order book model, agents’ strategies, and link liquidity provision to volatility estimates. I focus the analysis on the dynamics and structures of the book in Sect. 3. I discuss the economic implications of the results and draw conclusions in the last sections.

Paper prepared for the Kolkata V Econophysics Conference at the Saha Institute of Nuclear Physics, India 2010. The discoveries presented in this paper are consistent with the logics and structures of my research works at École Normale Supérieure, Paris, at the Santa Fe Institute and at the Australian National University.