Intraday ecology of electronic limit order market: empirical evidence and multiscale modelling
Seminar Room 2, Newton Institute Gatehouse
AbstractThe advent of computerized trading is often associated with higher frequency of order arrivals and higher rate of trade executions. However, empirical study of order flows submitted by market participants in electronic limit order markets shows a key feature of these market to be a widening of spectrum of frequencies, with a high heterogeneity of order activity across participants. Based on empirical evidence from the S&P futures markets, we show that order flow of 'high-frequency' participants is qualitatively different from that of low frequency ones, both in terms of directionality, inventory and their impact of the limit order book. In particular, there is evidence that a category of HFT, while contributing a major component of order volume, may not necessarily increase market depth.
Based on this empirical evidence, we argue that any model for examining the impact of HFT on market dynamics should allow for order flows occurring at (widely) differing frequencies. We present such a stochastic model, which mimics the features observed in intraday data, and show that the separation of frequencies leads to an asymptotic regime in which the evolution of the limit order book may be described by a simple stochastic equation.