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Dynamical Trading Mechanism in Limit Order Markets

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  • Shilei Wang

Abstract

This work's purpose is to understand the dynamics of limit order books in order-driven markets. We try to illustrate a dynamical trading mechanism attached to the microstructure of limit order markets. We capture the iterative nature of trading processes, which is critical in the dynamics of bid-ask pairs and the switching laws between different traders' types and their orders. In general, after introducing the atomic trading scheme, we study a general iterated trading process in both combinatorial and stochastic ways, and state a few results on the stability of a dynamical trading system. We also study the controlled dynamics of the spread and the mid-price in an iterated trading system, when their movements, generated from the dynamics of bid-ask pairs, are assumed to be restricted within some extremely small ranges.

Suggested Citation

  • Shilei Wang, 2013. "Dynamical Trading Mechanism in Limit Order Markets," Papers 1303.3133, arXiv.org.
    • Handle: RePEc:arx:papers:1303.3133
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    References listed on IDEAS

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    1. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
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    7. Bruce N. Lehmann and David M. Modest., 1994. "Trading and Liquidity on the Tokyo Stock Exchange: A Bird's Eye View," Research Program in Finance Working Papers RPF-234, University of California at Berkeley.
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    More about this item

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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