Order book

Abstract: Under fairly general conditions, the article derives the equilibrium price schedule determined by the bids and offers in an open limit order book. The analysis shows: (1) the order book has a small-trade positive bid-ask spread, and limit orders profit from small trades; (2) the electronic exchange provides as much liquidity as possible in extreme situations; (3) the limit order book does not invite competition from third market dealers, while other trading institutions do; (4) If an entering exchange earns nonnegative trading profits, the consolidated price schedule matches the limit order book price schedule. THIS ARTICLE PROVIDES AN analysis of an idealized electronic open limit order book. The focus of the article is the nature of equilibrium in such a market and how an open limit order book fares against competition from other methods of exchanging securities. The analysis suggests that an electronic open limit order book mimics competition among anonymous exchanges. As a result, there is no incentive to set up a competing anonymous dealer market. On the other hand, any other anonymous exchange will invite "third market" competition. These conclusions suggest that an electronic open limit order book of the sort considered here has a chance of being a center of significant trading volume. The analysis does not imply that an electronic limit order book will be, or should be the only trading institution. It does suggest some of the characteristics that an alternative institution should have in ord'er to successfully compete with an electronic exchange. The results are obtained in a fairly general environment, and hence would appear to be robust. The motivation for the article lies in recent developments in information processing technology, the interest in institutional innovation in the securities industry, and the uncertainty about future developments in trading

Abstract: This article presents a one-tick dynamic model of a limit order market. Agents choose to submit a limit order or a market order depending on the state of the limit order book. Each trader knows that her order will affect the order placement strategies of those who follow and the execution probability of her limit order is endogenous. All traders take this into account which, in equilibrium, generates systematic patterns in transaction prices and order placement strategies even with no asymmetric information. One of the most common ways in which traders exchange securities is in markets based on a limit order book. In a limit order market investors can post price-contingent orders to buy/sell at preset limit prices. Exchanges which operate in this fashion are the Paris Bourse, Tokyo, Toronto, and Sydney. 1 Despite the prevalence of the limit order system, the dynamic aspects of the limit order book have not been well explored. This article presents an explicitly dynamic model of the limit order book in a one-tick market. Traders with different valuations for an asset arrive randomly at a marketplace and trade either immediately by submitting a market

Abstract: A security trading consolidation system where each customer uses a single trader terminal (101) to view, and analyze security market information from and to conduct security transactions with two or more ECNs, or other comparable ATSs, alone or in combination with one or more electronic exchanges. A consolidating computer system (100) supplies the market information and processes the transactions. The consolidating computer system (100) aggregates order book information from each participating ECN order book computer including security, order identification (14), and bid/ask prices information. Bid and ask prices for participating electronic exchanges may be integrated into the display. The combined information is displayed to a customer by security and by bids and offers, and then sorted by price, volume, and other available attributes as desired by the customer.

Abstract: We study the cause of large fluctuations in prices on the London Stock Exchange. This is done at the microscopic level of individual events, where an event is the placement or cancellation of an order to buy or sell. We show that price fluctuations caused by individual market orders are essentially independent of the volume of orders. Instead, large price fluctuations are driven by liquidity fluctuations, variations in the market's ability to absorb new orders. Even for the most liquid stocks there can be substantial gaps in the order book, corresponding to a block of adjacent price levels containing no quotes. When such a gap exists next to the best price, a new order can remove the best quote, triggering a large midpoint price change. Thus, the distribution of large price changes merely reflects the distribution of gaps in the limit order book. This is a finite size effect, caused by the granularity of order flow: in a market where participants place many small orders uniformly across prices, such large...