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Whenever we replace an order, we lost priority since we are added to the end of the queue. If we dont replace an order, there is an obvious chance that we might get picked. There are other situations possible, when we replace deeper back and forth in the book and keep losing priority. Is there any literature which discusses this trade off and what is an optimal way of replacing orders?

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    $\begingroup$ > we might get picked Can you elaborate? If the order reflects your intention to buy, why is it bad if a counter order is matched? Also, some exchanges support ORDER_MOVE which can be used to speed-up price changes. $\endgroup$ Jan 24 at 14:00
  • $\begingroup$ as a market maker, i need to replace my order if the market moves, else i will be picked and traded at the wrong price. $\endgroup$
    – nimbus3000
    Jan 24 at 14:25
  • $\begingroup$ I'd be curios to learn more about this topic as well, but the simple solution is to cancel all orders in periods of volatility, unless the data feed for the underlying runs on microwave from the rooftop tower. $\endgroup$ Jan 24 at 16:58
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  1. An order loses time priority when its replace size is higher than current size at same price.
  2. An order does not lose time priority when replace size is lower or equal to earlier size at same price.

Build a probabilistic model of order being filled at various price depths and sizes. Doing this for a single instrument uncorrelated is comparatively simpler, however for correlated instruments like options of same underlying is harder.

You may refer to the following -

Guo, Xin, Zhao Ruan, and Lingjiong Zhu. "Dynamics of order positions and related queues in a limit order book." arXiv preprint arXiv:1505.04810 (2015).

Moallemi, Ciamac C., and Kai Yuan. "A model for queue position valuation in a limit order book." Columbia Business School Research Paper 17-70 (2016).

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  • $\begingroup$ different exchanges and different products have different prioritisation algorithms. Also how orders are programatically interfaced with the exchange may affect their priority. $\endgroup$
    – Attack68
    Feb 1 at 11:38
  • $\begingroup$ thats absolutely true - CME itself supports multiple matching algorithms for different products - cmegroup.com/confluence/display/EPICSANDBOX/… $\endgroup$
    – shoonya
    Feb 2 at 4:03

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