Date: Wednesday, December 16, 2015
Location: 1068 East Hall (3:00 PM to 4:00 PM)
Title: Endogenous Formation of Limit Order Books: the Effects of Trading Frequency
Abstract: In this work, we present a modeling framework in which the shape and dynamics of a Limit Order Book (LOB) arise endogenously from an equilibrium between multiple market participants (agents). On the one hand, the new framework captures very closely the true, microlevel, mechanics of an auctionstyle exchange. On the other hand, it uses the standard abstractions of games with continuum of players (in particular, the mean field game theory) to obtain a tractable macrolevel description of the LOB. We use the proposed modeling framework to analyze the effects of trading frequency on the liquidity of the market in a very general setting. In particular, we show that the higher trading frequency increases market efficiency if the agents choose to provide liquidity in equilibrium. However, the higher trading frequency also makes markets more fragile, in the following sense: in a highfrequency trading regime, the agents choose to provide liquidity in equilibrium if and only if they are marketneutral (i.e. their beliefs satisfy certain martingale property). The theoretical results are illustrated with numerical examples.
Files: 3426_LOBMFG.pdf
Speaker: Sergey Nadtochiy
Institution: UM
Event Organizer: Erhan Bayraktar erhan@umich.edu
