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Microstructure-based order placement in a continuous double auction agent based model

Author

Listed:
  • Mandeş, Alexandru

    (Justus-Liebig University of Giessen, Institute of Statistics and Econometrics)

Abstract

This contribution proposes a novel order placement strategy which can be used for simulating continuous double auction financial markets, within an agent-based model framework. The order placement decision is given by an optimization problem which minimizes the risk adjusted execution cost, taking into consideration relevant market microstructure factors and intrinsic agent characteristics. This order submission process is more realistic than has been done previously and contributes to a higher fidelity of the intraday market dynamics. The results show that, as opposed to random submission strategies, high-frequency stylized facts such as the concave shape of the market price impact function and the power-law decaying relative price distribution of off-spread limit orders are replicated. Therefore, the resulting model can be used as a realistic test environment for high-frequency trading strategies, in the context of the current, heated debate over the impact of high-frequency trading. Not only the impact of individual trading strategies can be analyzed, but also the interdependencies and the global emergent behavior of multiple coexistent strategies. Moreover, innovative regulatory policies, which have not been tested yet under real market conditions, could be inspected.

Suggested Citation

  • Mandeş, Alexandru, 2015. "Microstructure-based order placement in a continuous double auction agent based model," Algorithmic Finance, IOS Press, vol. 4(3-4), pages 105-125.
    • Handle: RePEc:ris:iosalg:0040
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    Citations

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    Cited by:

    1. Ivan Jericevich & Patrick Chang & Tim Gebbie, 2021. "Simulation and estimation of an agent-based market-model with a matching engine," Papers 2108.07806, arXiv.org, revised Aug 2021.
    2. Dicks, Matthew & Paskaramoorthy, Andrew & Gebbie, Tim, 2024. "A simple learning agent interacting with an agent-based market model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 633(C).

    More about this item

    Keywords

    Agent based modeling; continuous double auction; order placement; market price impact; high-frequency simulation;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General

    Statistics

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