A Queuing Model for a Continuous Double-Auction Trading System
8 Pages Posted: 24 Aug 2009 Last revised: 10 Nov 2009
Date Written: August 24, 2009
Abstract
We implemented a newly adapted queuing model to analyze a continuous double-auction trading system. In the trading system, traders have to decide if they want to get a good price or if they want a quick transaction. If we can calculate the execution probability, it will help with this decision. The execution probability depends on the temporal market situation as a whole, and the liquidity of stock names. Given the complexity of the system, we had to make assumptions in order to simplify the system so that we could analyze it in a mathematical and comprehensible manner. By applying the queuing theory, we could calculate execution probabilities as a function of average order arrival rates and the initial number of bids (or asks) in the waiting queue.
Keywords: Market microstructure, Continuous double-auction trading system, Execution probability, Queue
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