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Microstructure-Based Order Placement in a Continuous Double Auction Agent Based Model

22 Pages Posted: 26 Jan 2016  

Alexandru Mandeş

University of Giessen

Date Written: January 25, 2016

Abstract

This contribution proposes a novel order placement strategy which can be used for simulating continuous double auction financial markets, within an agent-based model framework. The order placement decision is given by an optimization problem which minimizes the risk adjusted execution cost, taking into consideration relevant market microstructure factors and intrinsic agent characteristics. This order submission process is more realistic than has been done previously and contributes to a higher fidelity of the intraday market dynamics. The results show that, as opposed to random submission strategies, high-frequency stylized facts such as the concave shape of the market price impact function and the power-law decaying relative price distribution of off-spread limit orders are replicated. Therefore, the resulting model can be used as a realistic test environment for high-frequency trading strategies, in the context of the current, heated debate over the impact of high-frequency trading. Not only the impact of individual trading strategies can be analyzed, but also the interdependencies and the global emergent behavior of multiple coexistent strategies. Moreover, innovative regulatory policies, which have not been tested yet under real market conditions, could be inspected.

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Suggested Citation

Mandeş, Alexandru, Microstructure-Based Order Placement in a Continuous Double Auction Agent Based Model (January 25, 2016). Algorithmic Finance 2015, 4:3-4, 105-125. Available at SSRN: https://ssrn.com/abstract=2722226

Alexandru Mandeş (Contact Author)

University of Giessen ( email )

Betriebswirtschaftslehre VII
Giessen, WY 35394
Germany

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