University of Michigan at Ann Arbor; Xerox Corp. - Palo Alto Research Center
Board of Governors of the Federal Reserve System (FRB)
Jeffrey H. Harris
Andrei A. Kirilenko
Massachusetts Institute of Technology (MIT) Sloan School of Management
March 5, 2010
We model and measure patterns of order execution in order driven markets. We model these patterns as trading networks - graphs consisting of traders (nodes) and pairwise buy-sell connections among them (edges) that occured within a period of time. We construct a time series of over 12,000 trading networks using audit trail, transaction-level data for the September 2009 E-mini S&P 500 futures contract. We find that network metrics that quantify patterns of order execution are highly contemporaneously correlated with returns, volatility, volume, duration, and market liquidity. We also find that network metrics strongly Granger-cause intertrade duration and trading volume, but are not Granger-caused by them. We conclude that network metrics can be used to characterize the interaction between latent order submission strategies and transaction prices, trading volume, intertrade duration, and liquidity.
Number of Pages in PDF File: 32
Keywords: trading networks, financial networks, limit order book, limit order markets
JEL Classification: G12, D82, D83, D85working papers series
Date posted: March 17, 2009 ; Last revised: March 14, 2010
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