(In)stability properties of limit order dynamics

Eyal Even-Dar*, Sham M. Kakade, Michael Kearns, Yishay Mansour

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review

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.

Original languageEnglish
Title of host publicationProceedings of the 7th ACM Conference on Electronic Commerce 2006
PublisherAssociation for Computing Machinery
Pages120-129
Number of pages10
ISBN (Print)1595932364, 9781595932365
DOIs
StatePublished - 2006
Event7th ACM Conference on Electronic Commerce - Ann Arbor, MI, United States
Duration: 11 Jun 200615 Jun 2006

Publication series

NameProceedings of the ACM Conference on Electronic Commerce
Volume2006

Conference

Conference7th ACM Conference on Electronic Commerce
Country/TerritoryUnited States
CityAnn Arbor, MI
Period11/06/0615/06/06

Keywords

  • Computational Finance
  • Market Microstructure

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