An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse

Abstract

Because the Paris Bourse is a centralized, computerized, limit order market, the dataset it generates is particularly appropriate for studying the interaction between the order book and order flow dynamics. We use descriptive methods to capture the richness of the data and the distinctive aspects of the market structure. We characterize the average order book and order flow. Order flow is concentrated near the quote, while the book is somewhat thinner at the quote than at nearby valuations. We analyze how the order flow is affected by the state of the book and the previous order flow documenting the supply and demand of liquidity in the market. For example, we find that thin books elicit orders and thick books result in trades. We also find evidence of priority effects. For example, investors quickly place orders within the quotes when the depth at the quotes is large or when the spread is large in order to gain price and time priority. Some of our results are also consistent with information effects. For example, a downward (upward) shift in the bid and ask quotes is observed after large sales (purchases).

JEL Classification: G00