Volume Imbalance and Market Making*

Álvaro Cartea (), Ryan Donnelly and Sebastian Jaimungal

Chapter 3 in Recent Advances in Financial Engineering 2014:Proceedings of the TMU Finance Workshop 2014, 2016, pp 57-73 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Shortcomings of continuous and static microstructure models are noted with motivation provided by data from the NASDAQ. The influence of order imbalance on microstructure dynamics is incorporated in to a model which allows the agent to adjust their strategy based on an easily observable quantity. The predictive power of order imbalance allows the agent to decide when they should trade more agressively to take advantage of beneficial price movements, and when they should trade more conservatively to protect against adverse selection effects. High imbalance results in a stronger inclination to place limit buy orders with the opposite effect on limit sell orders.

Keywords: Financial Engineering; Mathematical Finance; Money & Banking; Risk Management; Real Option; Corporate Finance; Computational Finance (search for similar items in EconPapers)
Date: 2016
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