Seminar Event Detail

Financial/Actuarial Mathematics

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, micro-level, mechanics of an auction-style 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 macro-level 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 high-frequency trading regime, the agents choose to provide liquidity in equilibrium if and only if they are market-neutral (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


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