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How does the market react to your order flow?

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Author Info

  • B. T�th
  • Z. Eisler
  • F. Lillo
  • J. Kockelkoren
  • J.-P. Bouchaud
  • J.D. Farmer

Abstract

We present an empirical study of the intertwined behaviour of members in a financial market. Exploiting a database where the broker that initiates an order book event can be identified, we decompose the correlation and response functions into contributions coming from different market participants and study how their behaviour is interconnected. We find evidence for the following. (1) Brokers are very heterogeneous in liquidity provision—some appear to be primarily liquidity providers while others are primarily liquidity takers. (2) The behaviour of brokers is strongly conditioned on the actions of other brokers. In contrast, brokers are only weakly influenced by the impact of their own previous orders. (3) The total impact of market orders is the result of a subtle compensation between the same broker pushing the price in one direction and the liquidity provision of other brokers pushing it in the opposite direction. These results enforce the picture of market dynamics being the result of the competition between heterogeneous participants, interacting to form a complex market ecology.

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File URL: http://hdl.handle.net/10.1080/14697688.2012.690886
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 12 (2012)
Issue (Month): 7 (May)
Pages: 1015-1024

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Handle: RePEc:taf:quantf:v:12:y:2012:i:7:p:1015-1024

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References

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  1. J. Doyne Farmer, 2002. "Market force, ecology and evolution," Industrial and Corporate Change, Oxford University Press, vol. 11(5), pages 895-953, November.
  2. Jean-Philippe Bouchaud & Yuval Gefen & Marc Potters & Matthieu Wyart, 2003. "Fluctuations and response in financial markets: the subtle nature of `random' price changes," Science & Finance (CFM) working paper archive 0307332, Science & Finance, Capital Fund Management.
  3. B. Tóth & F. Lillo & J. D. Farmer, 2010. "Segmentation algorithm for non-stationary compound Poisson processes," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 78(2), pages 235-243, November.
  4. J. Doyne Farmer & Austin Gerig & Fabrizio Lillo & Szabolcs Mike, 2006. "Market efficiency and the long-memory of supply and demand: is price impact variable and permanent or fixed and temporary?," Quantitative Finance, Taylor & Francis Journals, vol. 6(2), pages 107-112.
  5. Esteban Moro & Javier Vicente & Luis G. Moyano & Austin Gerig & J. Doyne Farmer & Gabriella Vaglica & Fabrizio Lillo & Rosario N. Mantegna, 2009. "Market impact and trading profile of large trading orders in stock markets," Papers 0908.0202, arXiv.org.
  6. Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters, 2004. "Random walks, liquidity molasses and critical response in financial markets," Science & Finance (CFM) working paper archive 500063, Science & Finance, Capital Fund Management.
  7. Albert J. Menkveld, 2011. "High Frequency Trading and the New-Market Makers," Tinbergen Institute Discussion Papers 11-076/2/DSF21, Tinbergen Institute, revised 15 Aug 2011.
  8. Lillo Fabrizio & Farmer J. Doyne, 2004. "The Long Memory of the Efficient Market," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(3), pages 1-35, September.
  9. Jean-Philippe Bouchaud & J. Doyne Farmer & Fabrizio Lillo, 2008. "How markets slowly digest changes in supply and demand," Papers 0809.0822, arXiv.org.
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Citations

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Cited by:
  1. Zhong, Li-Xin & Xu, Wen-Juan & Ren, Fei & Shi, Yong-Dong, 2013. "Coupled effects of market impact and asymmetric sensitivity in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(9), pages 2139-2149.
  2. Bence Toth & Imon Palit & Fabrizio Lillo & J. Doyne Farmer, 2011. "Why is order flow so persistent?," Papers 1108.1632, arXiv.org.

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