How does latent liquidity get revealed in the limit order book. Limit orders wait in a queue to be executed against market orders or canceled. Given that the instantaneous liquidity revealed in the limit order book is very. B 2g, two each on the ask and bid sides of the market. The limit order book has a price grid with four prices, p i fa 2.
Asset price tents to an equilibrium point and traders submit more. A dynamic model of the limit order book wharton finance. The limit order book as a market for liquidity request pdf. A tick size reduction yields a large improvement in liquidity. We study how limit order markets absorb transient liquidity shocks, which occur when a significant fraction of investors lose their willingness and ability to hold assets. Conversely, a trader posting on the ask side of a book displaying the same book imbalance will experience a price movement with a downward bias. Trade arrival dynamics and quote imbalance in a limit. Liquidity, orderbook, convexity, intraday pattern, dynamic adjustment, price discovery. In particular, for a given asset the expected average price. Stochastic simulation framework for the limit order book. We offer several testable implications for various market quality measures such as spread, trading frequency, market resiliency, and time to execution for limit orders.
Order execution in the limit order book follows time and price priority. Limit order book dynamics and asset liquidity cuvillier verlag. In the former approach, statistical properties of the limit order book for the target nancial asset are developed and conditional quantities are then derived and mod eled 8,10,20,33,35. The dynamics of a limit order book resembles in many aspects that of a queuing system. December 31, 2003 abstract i propose a continuoustime model of price formation in a market where trading is conducted according to a limitorder book. Market liquidity and convexity of orderbook evidence. Latency and liquidity provision in a limit order book. Modeling highfrequency limit order book dynamics with. Two variables are the key determinants of the limit order book dynamics in equilibrium. Pdf strategic liquidity provision in a limit order book.