The Price Impact of Order Book Events: Market Orders, Limit Orders and Cancellations

29 Pages Posted: 6 Apr 2009

See all articles by Zoltan Eisler

Zoltan Eisler

Capital Fund Management

Jean-Philippe Bouchaud

Capital Fund Management

Julien Kockelkoren

affiliation not provided to SSRN

Date Written: April 6, 2009

Abstract

While the long-ranged correlation of market orders and their impact on prices has been relatively well studied in the literature, the corresponding studies of limit orders and cancellations are scarce. We provide here an empirical study of the cross-correlation between all these different events, and their respective impact on future price changes. We define and extract from the data the "bare" impact these events would have, if they were to happen in isolation. For large tick stocks, we show that a model where the bare impact of all events is permanent and non-fluctuating is in good agreement with the data. For small tick stocks, however, bare impacts must contain a history dependent part, reflecting the internal fluctuations of the order book. We show that this effect can be accurately described by an autoregressive model on the past order flow. This framework allows us to decompose the impact of an event into three parts: an instantaneous jump component, the modification of the future rates of the different events, and the modification of the future gaps behind the best quotes. We compare in detail the present formalism with the temporary impact model that was proposed earlier to describe the impact of market orders when other types of events are not observed. Finally, we extend the model to describe the dynamics of the bid-ask spread.

Keywords: price impact, market orders, limit orders, cancellations, market microstructure, order flow

Suggested Citation

Eisler, Zoltan and Bouchaud, Jean-Philippe and Kockelkoren, Julien, The Price Impact of Order Book Events: Market Orders, Limit Orders and Cancellations (April 6, 2009). Available at SSRN: https://ssrn.com/abstract=1373762 or http://dx.doi.org/10.2139/ssrn.1373762

Zoltan Eisler (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

Julien Kockelkoren

affiliation not provided to SSRN ( email )

Register to save articles to
your library

Register

Paper statistics

Downloads
1,128
rank
16,797
Abstract Views
6,519
PlumX Metrics