Instantaneous order impact and high-frequency strategy optimization in limit order books
Federico Gonzalez and
Papers from arXiv.org
We propose a limit order book (LOB) model with dynamics that account for both the impact of the most recent order and the shape of the LOB. We present an empirical analysis showing that the type of the last order significantly alters the submission rate of immediate future orders, even after accounting for the state of the LOB. To model these effects jointly we introduce a discrete Markov chain model. Then on these improved LOB dynamics, we find the policy for optimal order choice and placement in the share purchasing problem by framing it as a Markov decision process. The optimal policy derived numerically uses limit orders, cancellations and market orders. It looks to exploit the state of the LOB summarized by the volume at the bid/ask and the type of the most recent order to obtain the best execution price, avoiding non-execution and adverse selection risk simultaneously. Market orders are used aggressively when the mid-price is expected to move adversely. Limit orders are placed under favorable LOB conditions and canceled when non-execution or adverse selection probability is high. Using ultra high-frequency data from the NASDAQ stock exchange we compare our optimal policy with other submission strategies that use a subset of all available order types and show that ours significantly outperforms them.
New Economics Papers: this item is included in nep-mst
Date: 2017-07, Revised 2017-10
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
http://arxiv.org/pdf/1707.01167 Latest version (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1707.01167
Access Statistics for this paper
More papers in Papers from arXiv.org
Series data maintained by arXiv administrators ().