(In)Stability Properties of Limit Order Dynamics

Citation:

E. Even-Dar, S. M. Kakade, M. Kearns, and Y. Mansour, (In)Stability Properties of Limit Order Dynamics. ACM Conference on Electronic Commerce: , 2006.

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 model enjoys provably strong stability properties, the relative 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.

Publisher's Version

See also: 2006
Last updated on 10/14/2021