Questions tagged [market-microstructure]

Market microstructure is generally speaking the way markets are organized at the impact of there structure on the price formation process.

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71 views

Can someone explain to me the square root law of market impact?

The square root law is shown here: Market impact, why square root? Let's say I want to execute 100 lots. But I have never executed before so I have no idea what n is historically. How would I ...
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95 views

Simulating Bid-Ask Spreads

I would like to examine the impact of the volatility on the transaction costs (Bid-ask spread). In my case I would like to examine this for power prices. However, I don't have access to actual order ...
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Feature engineering for mid-price prediction - quickly changing features

I'm training a fully-connected feed-forward neural network on HFT (limit order book) data to predict the midprice at timepoint $t+\Delta t$ (assuming that $t$ is the current moment, and $\Delta t$ is ...
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50 views

How do locked markets get resolved in a low-volume market?

Consider a low-volume exchange-traded security that sometimes sees no trading volume for days on end. Examples of such securities are some bonds, preferred shares, SPACs, and ETFs listed on the NYSE ...
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What would be the point of Roll (1984) on measuring the effective bid-ask spread?

If you look at the original paper of Roll (1984), he explains that part of the transaction costs borne out by investors would be the bid-ask spread and that it was "fraught with measurement ...
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Kyle-style models and empirical research

Kyle (1985) introduced a model of insider trading where an informed trader seeks to capitalize on their information by chosing the size of a market order. Of course, many variants thereof have been ...
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67 views

Equilibrium in the Kyle (1985) model

In his 1985 paper, Kyle presents 3 versions of the same model: a single period model, a multiple period model and the continuous time limit of the multiple period model. When he formalizes the ...
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Complexity of using balanced-tree to model order book

I have bene researching on the best data structure to implement a limit order book. Some of the most common implementations include arrays and balanced trees. This link has a good set of references. ...
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81 views

Estimating the spread of a market maker

If we have an order book and we assume that we know there is only one market maker, how can we determine exactly the spread of the market maker? What if there are more than one market makers?
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63 views

How is market depth data useful

I was wondering how market depth data is useful if the orders which change the price would not be available . If we consider the orders which change the price , these are the orders where the bid on ...
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modeling the volume of TOB of a LOB

In Limit Order Books, orders at the same price are grouped and I call this group of orders a "price level"(I don't know if there's a name in literature). The total volume in this price level ...
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How to model asset prices for a very short time period

Geometric Brownian motion is the most common model for asset price evolution. Is it still viable for modeling asset prices in a very short time period? For example, I have time series of length 3600 ...
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What is the meaning of this notation, D lag t?

I'm reading the book Financial Markets Under the Microscope to study market microstructure. There is a notation that I could not understand. What is the meaning of D here? It is not used in the text ...
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266 views

How can we estimate new stock price after a large purchase?

Suppose someone buys $4bn of a particular stock over the period of a few weeks. Depending on how much that stock is being traded, you would expect that the price goes up in a visible way compared to ...
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Does anyone have codes that would solve the multi-period Kyle model?

Whenever I begin working on something new, I like to find existing examples of how things are done so that I can double check at least the basics before moving on to more complicated problems. I am ...
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Modeling regulations of middlemen

I am searching for some paper that models the regulations of market makers in stock or OTC markets. Is there anybody who have seen some marekt microstructure paper for modeling regulations and what ...
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104 views

Is the variance calculation correct in the book?

I'm reading the book "Financial Markets Under the Microscope" for my market microstructure studies. In the book, the variance of the market maker's gain is calculated as follows: Assume that with ...
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163 views

How to identify market makers in an orderbook?

I am trying to identify markets makers within an (options-)orderbook. Of course, this is far stretched, but I was wondering what kind of characteristics / patterns I should look at. I got the ...
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47 views

How to use the volatility indicator?

In the high frequency research, there are many research papers about the high frequency data to predict the volatility, My question is how to use the predicted volatility in the trading. And which is ...
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104 views

Order anticipation

Is there a way to anticipate order flow on a security. For simplicity's sake i'm referring to a security that is traded on one exchange and has a single order book, by anticipating order flow i mean ...
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Decision making framework for trading consumption assets in a forward exchange market

I am working on a forward market with limit order books. My idea is to illustrate market operations and trading behaviors through discrete event simulation. Consumption assets are traded in the market,...
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164 views

Optimization problem with a constraint

Consider the following maximization problem $$\max_{\{\tau(\cdot),q(\cdot)\}}\int_{\underline{\theta}}^{\bar{\theta}}\left(\theta q(\theta)-\dfrac{\gamma\sigma^{2}}{2}q^2(\theta)-\tau(\theta)\right)f(\...
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Market Making constant volatility assumption

I have read a few papers on market making and all(nearly) assume that the stock follows a brownian motion with no drift and constant volatility.These assumptions seems un-intuitive to me because of ...
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104 views

Futures vs. spot forecasting

If i have the belief that the futures lead the spot for price discovery, and I am able to forecast the future prices, given this forecast, what would be the best way to back out this number such that ...
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Why do large tick stocks like Microsoft have tighter spreads than small tick stocks such as Amazon?

Define the relative tick for a stock as $\tilde{\tau} = \tau/x(t)$ where $\tau$ is an exchange's tick size and $x(t)$ is a mid-price. When $\tilde{\tau}$ is large, $\tilde{\tau} \gtrapprox 0.02\% - 0....
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Does anyone have any pproximate idea what it would cost to get a FIX and OUCH connection from NASDAQ

I would like to know how much the exchange fees would be to connect and place orders directly with NASDAQ using one of their third party suppliers or directly. I took a look at the pricing page but it ...
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How do market makers make money

I was looking into market making and the common idea is market makers make money by capturing the spread. I am a little confused about how this works, since on an exchange if the stock is listed that ...
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How is market buy order executed when meeting both market sell order and limit sell order?

Currently, we all know how market buy order is executed when meeting only limit sell order for time-priority rule.
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257 views

Micro-pricing of futures

I’ve heard that a lot of HFT use so called micro price for making predictions for futures and other product. Basically it convert the LOB and order message to a single number. I know it is kind of ...
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Arithmetic Brownian Motion in Market Making papers

We often consider high-frequency market maker and suppose that the reference price is the arithmetic Brownian Motion: $dS_{t} = \sigma d W_t$ What is the difference $t_n - t_{n-1}$ in this case? Is ...
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234 views

Should a high-frequency market-making fair value be a point or bid/offer pair?

A single micro-price (e.g., volume weighted mid adjusted for recent trades) is simpler and can be used for pricing both our bid and our offer. But a bid fair and an offer fair have the desirable ...
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how to model NGARCH using 5min frequency data?

NGARCH model using 5-min High-frequency data in R I wanted to analyze some 5 minute frequency data of stock market. My teacher asked me to use NGARCH to model, but I didn't know how to program.Here ...
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251 views

Extreme Negative Gamma

I see Zero Hedge, talk about extreme negative gamma position of dealers all the time which it then ties back to market moves. I was wondering how do you calculate such market positioning based on ...
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117 views

Modelling Order Flow

I am trying to model the number of order that come at a distance d from the top of the book on either side, both bid and ask. I was wondering what is a good way to model orders which improve the ...
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Which dates are optimal for monthly rebalancing of a futures portfolio?

As there are microstructure issues with the commodity market, e.g. the Goldman roll, is there any research on when it is optimal to monthly rebalance?
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255 views

ETF Market Making

I understand market makers of ETFs earn a bid-ask spread (buying low from investors and selling high in the market). But how exactly do they determine when's the right time to buy, and at what price? ...
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1answer
360 views

High Frequency Trading in LoB - Sasha Stoikov and Marco Avellaneda

I am reading the paper High Frequecy Trading in a Limit Order Book by Sasha Stoikov and Marco Avellaneda. There is a point that I am having trouble understanding. The authors give a definition of ...
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476 views

Bid-Ask spread in Roll's model: Negative autocovariance of returns and informational content

Currently studying on techniques to estimate the bid-ask spread. Perhaps the most widely known model is the Roll model (1984). Let $P_t$ indicate log prices $\begin{cases} Bid_t=P_t-c, \\ ...
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Why was a buy position not closed at the seller's price?

I'm trying to understand how the trading of crypto-currencies work. I imagine it's not that different from standard currency (or asset) trading, so I ask in this site. Consider the crypto market ...
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367 views

Predicting microstructure momentum in market making

If I have a market maker which is compelled to provide quotes on both sides of the market, I am exposed to risk of quadratic losses (vs my linear gains during normal operations) during times when the ...
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51 views

Expected shares filled from a limit order

If I place a limit order to buy a stock at the bid, what is the expected number of shares that will be filled by the close? I think it depends on The time until the close. More time until the close ...
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What is the order flow imbalance?

The price impact of order book event is an arxiv article which shows that, over short time intervals, price changes are mainly driven by the order flow imbalance, defined as the imbalance between the ...
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Difference between Stop sell and limit sell

Currently studying Market Microstructure. A proposition says that for liquidating a position, we never set a limit sell order, but a stop loss. Practically, shouldn't these be the same (stop loss ...
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Modelling HFT data

In the context of Market making, how important is recent trades? In general, would i be able to get away with just modelling the Limit Order Book (LOB) and the evolution of the LOB in order to ...
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730 views

What actually drives a stock price up ou down?

Can someone please explain to me how stock prices go up and down? What are the underlying physical and information technology phenomena and algorithms that drive a stock up or down? Books just say ...
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178 views

“J” message type in Nasdaq ITCH Totalview sample file

I am trying to parse the uncompressed file 10302018.NASDAQ_ITCH50 (from ftp://emi.nasdaq.com/ITCH/10302018.NASDAQ_ITCH50.gz). There is a strange message type "J". The spec (https://www.nasdaqtrader....
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297 views

Market making: Predicting when to submit a bid at the ask

The exchange I'm trading on lacks a workable stop limit order type (and just deprecated OTO orders), so in order to be first at the old ask with my bid on an up tick, I have to predict the time when ...
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Market impact, why square root?

The standard method of market impact is the square-root formula \begin{equation} \Delta P = c \cdot\sigma \cdot \sqrt{\frac{n}{\nu}} \end{equation} where $\Delta P$ is the price change from executing ...
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Comparison of normalization methods on market returns

I am looking to use a multi-factor model to make target-return predictions. Since the factor-returns come from different scales I need to normalize first. There are different ways to normalize ...
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297 views

Option order imbalance

Currently studying the paper: HU, Jianfeng. Does Option Trading Convey Stock Price Information?. (2014). Journal of Financial Economics. 111, (3), 625-645. Research Collection Lee Kong Chian School ...