63 Pages Posted: 19 Apr 2015 Last revised: 17 Jul 2015
Date Written: July 16, 2015
I develop a model that quantifies the profitability of trading from limit order data. This method allows for estimation of the effective number of market participants without the need for trader IDs or proprietary datasets. In addition, my framework can evaluate several different questions in modern markets which are difficult to evaluate because of flickering quotes, algorithmic in-and-out strategies and other high frequency changes to the order book. As an illustration of my method, I fit parameters to the model using Google stock surrounding an earnings announcement in the 2nd quarter of 2010.
Keywords: imperfect competition, market microstructure, high frequency trading, limit order book
JEL Classification: D4, G1, L1, C51
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