Question about order book and single player interference

Question

Let us suppose I have 1 Million US Dollars, and I am given an ask value of 0.45 USD per share in a given share. Let us call it MRD3. If I place an order of the type bid, in which I offer only 0.01 USD per MRD3 share, generating a large order, how would this scenario change the order book dynamics?

I hope my question is clear. I was thinking about this the whole week.

Thank you for thinking about this theoretical (maybe nonsensical) problem with me.

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I want to make it a bit more clear. In general, it is believed that if we have more buyers than sellers, the price will rise and the same for a lot of sellers--if we have more sellers than buyers, the price will fall. This general understanding, unfortunately, is too simplistic. With my question, I am trying to understand the dynamics of the order book and Spoofing in Financial Markets. In my example, even with more shares wanted than offered in a given price range, the price of the share itself is not likely to fall. Yet, I am a bit interested in knowing about your thoughts on this.

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I am researching order book as a subject. I do not have any intention of manipulating the order book, but I have the intention of doing a PhD in Economics.

Answer 1

This is a complex question. First of all, you need to know that orderbook manipulation is illegal. That being said, I can rephrase you question as:

• given an orderbook
• say a new sell order of size $Q_A$ is inserted at the best ask
• and just after that a new buy order of size $Q_B$ is inserted at the best bid
• how does it changes future price moves?

This is well described by the Queue Reactive model (and there is a long section of the new edition of Market microstructure in practice about this): the arrival (ie proba of occurence) of a new limit or market order, or of a cancel, on any queue is a function of

• the size of the queue itself
• the size of the queue “behind it”
• and the size of the queue “in front of it”

Other queues are not that important. If the sizes of the queues change, on average the proba of next events change accordingly. Qualitatively: the more volume on one side of the book, the more the price will go in the other direction; traders call this the “predictability of the imbalance”.