How Does the Market React to Your Order Flow?

12 Pages Posted: 6 Apr 2011

See all articles by Bence Toth

Bence Toth

Santa Fe Institute

Zoltan Eisler

Capital Fund Management

Fabrizio Lillo

Università di Bologna

Jean-Philippe Bouchaud

Capital Fund Management

Julien Kockelkoren

Capital Fund Management

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School; Santa Fe Institute

Date Written: April 4, 2011

Abstract

We present an empirical study of the intertwined behaviour of members in a financial market. Exploiting a database where the broker that initiates an order book event can be identified, we decompose the correlation and response functions into contributions coming from different market participants and study how their behaviour is interconnected. We find evidence that (1) brokers are very heterogeneous in liquidity provision - some are consistently liquidity providers while others are consistently liquidity takers. (2) The behaviour of brokers is strongly conditioned on the actions of other brokers. In contrast brokers are only weakly influenced by the impact of their own previous orders. (3) The total impact of market orders is the result of a subtle compensation between the same broker pushing the price in one direction and the liquidity provision of other brokers pushing it in the opposite direction. These results enforce the picture of market dynamics being the result of the competition between heterogeneous participants interacting to form a complicated market ecology.

Keywords: Financial markets, market microstructure, limit order book, order flow, behavioural economics

Suggested Citation

Toth, Bence and Eisler, Zoltan and Lillo, Fabrizio and Bouchaud, Jean-Philippe and Kockelkoren, Julien and Farmer, J. Doyne, How Does the Market React to Your Order Flow? (April 4, 2011). Available at SSRN: https://ssrn.com/abstract=1803398 or http://dx.doi.org/10.2139/ssrn.1803398

Bence Toth (Contact Author)

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Zoltan Eisler

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Fabrizio Lillo

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126
Italy

Jean-Philippe Bouchaud

Capital Fund Management ( email )

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

Julien Kockelkoren

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

J. Doyne Farmer

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

HOME PAGE: http://www.inet.ox.ac.uk/people/view/4

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States
505-984-8800 (Phone)
505-982-0565 (Fax)

HOME PAGE: http://www.santafe.edu/~jdf/

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