Low-traffic limit and first-passage times for a simple model of the continuous double auction

Enrico Scalas, Fabio Rapallo and Tijana Radivojevi\'c

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Abstract: We consider a simplified model of the continuous double auction where prices are integers varying from $1$ to $N$ with limit orders and market orders, but quantity per order limited to a single share. For this model, the order process is equivalent to two $M/M/1$ queues. We study the behaviour of the auction in the low-traffic limit where limit orders are immediately transformed into market orders. In this limit, the distribution of prices can be computed exactly and gives a reasonable approximation of the price distribution when the ratio between the rate of order arrivals and the rate of order executions is below $1/2$. This is further confirmed by the analysis of the first passage time in $1$ or $N$.

Date: 2016-03
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Journal Article: Low-traffic limit and first-passage times for a simple model of the continuous double auction (2017)
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