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How does the market react to your order flow?

  • Bence Toth
  • Zoltan Eisler
  • Fabrizio Lillo
  • Julien Kockelkoren
  • Jean-Philippe Bouchaud
  • J. Doyne Farmer

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 that (1) brokers are very heterogeneous in liquidity provision -- some are consistently liquidity providers while others are consistently liquidity takers. (2) The behaviour of brokers is strongly conditioned on the actions of {\it 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 complicated market ecology.

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Paper provided by in its series Papers with number 1104.0587.

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Date of creation: Apr 2011
Date of revision: May 2012
Handle: RePEc:arx:papers:1104.0587
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  1. J. Doyne Farmer, 1998. "Market Force, Ecology, and Evolution," Research in Economics 98-12-117e, Santa Fe Institute.
  2. Bence Toth & Fabrizio Lillo & J. Doyne Farmer, 2010. "Segmentation algorithm for non-stationary compound Poisson processes," Papers 1001.2549,, revised Feb 2011.
  3. 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,
  4. 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.
  5. Jean-Philippe Bouchaud & J. Doyne Farmer & Fabrizio Lillo, 2008. "How markets slowly digest changes in supply and demand," Papers 0809.0822,
  6. Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters, 2006. "Random walks, liquidity molasses and critical response in financial markets," Quantitative Finance, Taylor & Francis Journals, vol. 6(2), pages 115-123.
  7. 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.
  8. 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.
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