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The Price Impact of Order Book Events

Author

Listed:
  • Rama Cont

    (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique, Columbia University [New York])

  • Arseniy Kukanov

    (Columbia University [New York])

  • Sasha Stoikov

    (Cornell University [New York])

Abstract

We study the price impact of order book events - limit orders, market orders and cancelations - using the NYSE TAQ data for 50 U.S. stocks. We show that, over short time intervals, price changes are mainly driven by the order flow imbalance, defined as the imbalance between supply and demand at the best bid and ask prices. Our study reveals a linear relation between order flow imbalance and price changes, with a slope inversely proportional to the market depth. These results are shown to be robust to seasonality effects, and stable across time scales and across stocks. We argue that this linear price impact model, together with a scaling argument, implies the empirically observed "square-root" relation between price changes and trading volume. However, the relation between price changes and trade volume is found to be noisy and less robust than the one based on order flow imbalance.

Suggested Citation

  • Rama Cont & Arseniy Kukanov & Sasha Stoikov, 2010. "The Price Impact of Order Book Events," Working Papers hal-00545745, HAL.
    • Handle: RePEc:hal:wpaper:hal-00545745
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    Citations

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    Cited by:

    1. Olivier Gu'eant & Charles-Albert Lehalle & Joaquin Fernandez Tapia, 2011. "Dealing with the Inventory Risk. A solution to the market making problem," Papers 1105.3115, arXiv.org, revised Aug 2012.
    2. Charles-Albert Lehalle, 2013. "Market Microstructure Knowledge Needed for Controlling an Intra-Day Trading Process," Papers 1302.4592, arXiv.org.
    3. Rama Cont & Lakshithe Wagalath, 2012. "Fire Sales Forensics: Measuring Endogenous Risk," Working Papers hal-00697224, HAL.
    4. repec:dau:papers:123456789/7390 is not listed on IDEAS
    5. Paolo Guasoni & Mikl'os R'asonyi, 2015. "Hedging, arbitrage and optimality with superlinear frictions," Papers 1506.05895, arXiv.org.
    6. Alex Langnau & Yanko Punchev, 2011. "Stochastic Price Dynamics Implied By the Limit Order Book," Papers 1105.4789, arXiv.org.
    7. Olivier Gu'eant & Charles-Albert Lehalle & Joaquin Fernandez Tapia, 2011. "Optimal Portfolio Liquidation with Limit Orders," Papers 1106.3279, arXiv.org, revised Jul 2012.
    8. Hans Follmer & Alexander Schied, 2013. "Probabilistic aspects of finance," Papers 1309.7759, arXiv.org.
    9. Prakhar Ganesh & Puneet Rakheja, 2018. "VLSTM: Very Long Short-Term Memory Networks for High-Frequency Trading," Papers 1809.01506, arXiv.org, revised Oct 2020.
    10. repec:dau:papers:123456789/7391 is not listed on IDEAS

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