What are some standard simple ways of simulating an order book? I have found this paper, but it is missing the implementation details. And more importantly, it appears that it ignores the size of the limit orders when it "sweeps" the orders.

I am interested in backtesting a strategy where the size of the limit orders that I place into the order book - matter.

Any pointers would be highly appreciated.

  • 1
    $\begingroup$ just a quick comment, but if you backtest against a parametrised order book distribution then your results will likely depend on that assumption. It would also be worth investigating the sensitivity of the backtest to varying your parameters of the prder book; whatever you happen to come up with.. $\endgroup$ – Attack68 Jun 2 '19 at 18:42
  • $\begingroup$ that is a good point. I really liked the paper I linked at the start because it was not modelling the book explicitly. Rather they used a simple Geometric Brownian motion to simulate the price and then on top of that they simulate limit order arrivals (price + time + size). So all one would need is: 1. drift + vol for brownian motion; 2. interarrival times + distribution of sizes + the prices of limit orders. However, they do not reveal the details of how to simulate those limit orders exactly. $\endgroup$ – i squared - Keep it Real Jun 2 '19 at 18:49

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