Queuing Uncertainty in Limit Order Market

56 Pages Posted: 6 Oct 2013 Last revised: 31 Oct 2014

Date Written: October 31, 2014

Abstract

In a limit order market, orders submitted at about the same time are subject to random latencies and will be queued accordingly. A theoretical model captures the strategic behavior of market makers who, in anticipation of such queuing uncertainty, fiercely compete for the rent in liquidity provision. Flickering orders manifest in equilibrium: Book depth first overshoots and then immediately reverts to the stable level. Depending on the source of speed improvement, various latency reductions affect differently both the overshoot and the stabilization process. The analysis speaks to recent technology changes and market quality.

Keywords: limit order market, book depth, flickering orders, high frequency trading

JEL Classification: G10, D40

Suggested Citation

Yueshen, Bart Zhou, Queuing Uncertainty in Limit Order Market (October 31, 2014). Available at SSRN: https://ssrn.com/abstract=2336122 or http://dx.doi.org/10.2139/ssrn.2336122

Bart Zhou Yueshen (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

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