PASCAL - Pattern Analysis, Statistical Modelling and Computational Learning

(In)Stability Properties of Limit Order Dynamics
Eyal Even-Dar, Sham Kakade, Mchael Kearns and Yishay Mansour
In: ACM EC 2006, June 11-15, 2006, Ann Arbor, MI USA.

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 trader model enjoys provably strong stability properties, the relative trader 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.

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EPrint Type:Conference or Workshop Item (Paper)
Project Keyword:Project Keyword UNSPECIFIED
Subjects:Theory & Algorithms
ID Code:2471
Deposited By:Yishay Mansour
Deposited On:22 November 2006