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How spread changes affect the order book: comparing the price responses of order deletions and placements to trades

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  • Stephan Grimm

    (Fakultät für Physik, Universität Duisburg-Essen)

  • Thomas Guhr

    (Fakultät für Physik, Universität Duisburg-Essen)

Abstract

We observe the effects of the three different events that cause spread changes in the order book, namely trades, deletions and placement of limit orders. By looking at the frequencies of the relative amounts of price changing events, we discover that deletions of orders open the bid-ask spread of a stock more often than trades do. We see that once the amount of spread changes due to deletions exceeds the amount of the ones due to trades, other observables in the order book change as well. We then look at how these spread changing events affect the prices of stocks, by means of the price response. We not only see that the self-response of stocks is positive for both spread changing trades and deletions and negative for order placements, but also cross-response to other stocks and therefore the market as a whole. In addition, the self-response function of spread-changing trades is similar to that of all trades. This leads to the conclusion that spread changing deletions and order placements have a similar effect on the order book and stock prices over time as trades. Graphical abstract

Suggested Citation

  • Stephan Grimm & Thomas Guhr, 2019. "How spread changes affect the order book: comparing the price responses of order deletions and placements to trades," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 92(6), pages 1-11, June.
    • Handle: RePEc:spr:eurphb:v:92:y:2019:i:6:d:10.1140_epjb_e2019-90744-3
    DOI: 10.1140/epjb/e2019-90744-3
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    References listed on IDEAS

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    1. Hausman, Jerry A. & Lo, Andrew W. & MacKinlay, A. Craig, 1992. "An ordered probit analysis of transaction stock prices," Journal of Financial Economics, Elsevier, vol. 31(3), pages 319-379, June.
    2. Mike, Szabolcs & Farmer, J. Doyne, 2008. "An empirical behavioral model of liquidity and volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 200-234, January.
    3. Jean-Philippe Bouchaud & J. Doyne Farmer & Fabrizio Lillo, 2008. "How markets slowly digest changes in supply and demand," Papers 0809.0822, arXiv.org.
    4. Jerry A. Hausman & Andrew W. Lo & Craig A. MacKinlay, "undated". "An Ordered Probit Analysis of Transaction Stock Prices (Reprint 029)," Rodney L. White Center for Financial Research Working Papers 26-91, Wharton School Rodney L. White Center for Financial Research.
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    Cited by:

    1. Wang, Shanshan & Schreckenberg, Michael & Guhr, Thomas, 2023. "Response functions as a new concept to study local dynamics in traffic networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 626(C).

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