A simulation analysis of the microstructure of double auction markets

Carl Chiarella and Giulia Iori

Quantitative Finance, 2002, vol. 2, issue 5, 346-353

Abstract: We introduce an order-driven market model with heterogeneous agents trading via a central order matching mechanism. Traders set bids and asks and post market or limit orders according to exogenously fixed rules. We investigate how different trading strategies may affect the dynamics of price, bid-ask spreads, trading volume and volatility. We also analyse how some features of market design, such as tick size and order lifetime, affect market liquidity. The model is able to reproduce many of the complex phenomena observed in real stock markets.

Date: 2002
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DOI: 10.1088/1469-7688/2/5/303

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