Strategic Liquidity Provision in Limit Order Markets

doi:10.3982/ecta10018

Cited by 39 publications

(2 citation statements)

References 12 publications

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“…In the model by Glosten (1994), the market order size is, in equilibrium, related to the traders' marginal valuation and the state of the order book. Under sufficient adverse selection, as described by Back & Baruch (2013), the liquidity suppliers' expected cost of trading with informed traders increases with the trade size.…”

Section: The Probability Of Execution Of a Limit Ordermentioning

confidence: 99%

The determinants of limit order cancellations

Dahlström

Hagströmer

Nordén

2023

The Financial Review

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Almost all limit orders are canceled. We examine two economic channels that can motivate cancellations: reductions in the expected profit at execution, and reductions in the probability of execution. An order‐level analysis shows that changes in depth at the best bid and offer prices, as well as changes in the order queue position, influence cancellation in a way consistent with the former channel, that market makers monitor the expected profit at execution of each limit order. Although buy‐side investors use passive orders extensively, our findings indicate that limit order cancellations on aggregate are best understood through models of liquidity provision.

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Section: The Probability Of Execution Of a Limit Ordermentioning

confidence: 99%

The determinants of limit order cancellations

Dahlström

Hagströmer

Nordén

2023

The Financial Review

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“…There is a large and growing literature modeling different aspects of the Limit Order Book [2,9,10,11,12,13,15,16,18,19]. In particular, the spreading of information and the price impact and of a large external order have been studied in [1,3,4].…”

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confidence: 99%

A dynamic model of the limit order book

Bressan¹,

Mazzola

Wei

2020

Discrete &Amp; Continuous Dynamical Systems - B

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We consider an equilibrium model of the Limit Order Book in a stock market, where a large number of competing agents post "buy" or "sell" orders. For the "one-shot" game, it is shown that the two sides of the LOB are determined by the distribution of the random size of the incoming order, and by the maximum price accepted by external buyers (or the minimum price accepted by external sellers). We then consider an iterated game, where more agents come to the market, posting both market orders and limit orders. Equilibrium strategies are found by backward induction, in terms of a value function which depends on the current sizes of the two portions of the LOB. The existence of a unique Nash equilibrium is proved under a natural assumption, namely: the probability that the external order is so large that it wipes out the entire LOB should be sufficiently small.

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A Bidding Game with Heterogeneous Players

Bressan

Wei

2014

J Optim Theory Appl

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A one-sided limit order book is modeled as a noncooperative game for n players. Agents offer various quantities of an asset at different prices p ∈ [0, P ], competing to fulfill an incoming order, whose size X is not known a priori. Players can have different payoff functions, reflecting different beliefs about the fundamental value of the asset and probability distribution of the random variable X. In [4] the existence of a Nash equilibrium was established by means of a fixed point argument.The main issue discussed in the present paper is whether this equilibrium can be obtained from the unique solution to a two-point boundary value problem, for a suitable system of discontinuous ODEs. Some additional assumptions are introduced, which yield a positive answer. In particular, this is the case when there are exactly 2 players, or when all n players assign the same exponential probability distribution to the random variable X. A counterexample shows that these assumptions cannot be removed.

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Strategic Liquidity Provision in Limit Order Markets

Cited by 39 publications

References 12 publications

The determinants of limit order cancellations

The determinants of limit order cancellations

A dynamic model of the limit order book

A Bidding Game with Heterogeneous Players

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