Information, Sentiment, and Price in a Fast Order-Driven Market

Abstract

The paper models an order-driven market in which many traders with heterogeneous private values and information submit limit and market orders simultaneously. Order execution is partially random. There may be a bias in the traders’ prior beliefs (market sentiment). In this environment, although market buys and sells depend monotonically on the degree of bullish sentiment, market order flows are in a non-monotonous relationship with the proportion of high private value traders (bulls). Additionally, sentiment has a stronger effect on volume and net direction of trades leading to a given central price, than the actual distribution of private values.